Auto Features Helping Younger Workers with Retirement Saving
Automatic enrollment is the single most important feature an employer can adopt for Millennials and new hires to participate in a company’s DC plan, according to a new study from Wells Fargo.
Based on an analysis of four million people who participate in 401(k) plans provided by the firm, Wells Fargo’s 2017 Driving Plan Health study
finds that Millennials have demonstrated the biggest gains in the percentage of those participating in their 401(k) plans over the last five years. Perhaps more significantly, the report shows that participation among Millennials for plans with auto enrollment is nearly 85%, but only 37.8% for plans without auto enrollment.
The study analyzed 90 different plan features and demographic attributes to determine which factors are most critical in driving three key components: participation, contribution rates and diversification. Automatic enrollment, total match, employer stock, communication campaigns, and having a QDIA were among the key factors that help drive results, according to the study.
For the purposes of setting a goal and tracking progress, Wells Fargo measured the percentage of participants on track to replace 80% of their pay in retirement. Based on the analysis, it appears that a higher percentage of Millennials are on track to reach this goal, coming in at 66%, compared to 51% of Gen X and 41% of Boomers.
“Best practices, such as enrolling participants at a 6% or higher deferral rate, pairing it with an opt-out automatic increase, and using a QDIA can set these younger, newer participants on the right track early and help avoid some of the common challenges and competing financial priorities they might otherwise encounter later in their careers,” Wells Fargo emphasizes.
Paralleling the increased adoption of automatic enrollment, the report shows that 18% more eligible employees are participating in their DC plan since 2011. In support of this finding, Wells Fargo’s data shows that 40% more plans automatically enroll participants compared to five years ago.
Meanwhile, the contribution rate is the biggest challenge most plans face, even though it has the greatest impact on outcomes, the report explains. Fewer than 40% of employees in a typical plan contribute 10% or more in total, and gains in this area have been the slowest of the three key components in the past five years, the authors note. To avoid this kind of “contribution pitfall,” Wells Fargo suggests a default deferral rate of 6% or higher, coupled with an opt-out automatic increase.
A higher total match has been a strong driver of both participation and contribution rates, even if automatic enrollment is not used, Wells Fargo adds. The study shows that average participation in plans without automatic enrollment with a 3%-6% match at nearly 56%, but that level rises to nearly 80% with a 6%-9% match.
Finally, the report notes that diversification is strongest among the youngest, most recently hired and lowest-earning participants. The authors emphasize that a greater proportion of these participants have been enrolled automatically in a plan with a QDIA resulting in better diversification, while older, longer-tenured participants have not benefited from this “default diversification.”