Client Service January 16, 2018

Clashing Financial Priorities Can Derail Participants

Paying down debt and needing cash for day-to-day expenses are top reasons for decreasing plan contributions this year. 

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During a recent webinar hosted by Broadridge, expert speakers from Market Strategies International presented their latest data detailing the aims and expectations of retirement plan participants.

The data shows strong ongoing increases in the offering and uptake of automatic plan design features, such as auto-enrollment and auto-escalation of salary deferrals, leading collectively to better-performing retirement plans. Tied to the greater use of more aggressive qualified default investment alternatives, most notably target-date funds and managed accounts, these automatic plan design features have had a strong positive impact on the anticipated outcomes of many participants, experts noted, and they should continue to do so. 

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However, the experts also presented findings having to do with participants who are not necessarily making optimal decisions within their defined contribution plans. One clear issue the experts addressed is the sizable group of participants who moved to decrease their retirement salary deferrals during the last year.

Within this group, the data shows 27% cited “needing to pay down debt and bills” as the primary reason for redirecting income away from retirement accounts. Another 25% cited “needing money for day-to-day expenses,” while 18% reduced salary deferrals to “finance a major life event” and 16% did so to “address less income.”

As the experts explained, these stats show the retirement planning effort can really only be successful once participants’ shorter-term financial priorities are addressed. Another common hurdle leading to meeker salary deferrals was “increased medical expenses” (10%).

The experts noted that the “end-to-end journey for a single participant experience with a given provider will have between 100 and 200 points of inflection across the consumer lifecycle.” By focusing on delivering the right educational content at the right time to the right people, plan providers and employers have a tremendous opportunity to improve overall outcomes, experts agreed.

The group concluded that retirement plan participants broadly benefit from financial wellness programming that on its surface might have very little to do with the strict topic of retirement planning. Again, this is due to very real possibility that financial hardship in the short term will prevent people from participating in tax-qualified retirement plans, or cause them to reduce their otherwise-appropriate deferrals. 

Data & Research January 16, 2018

Employer Contributions to 401(k)s Show Steady Increase

Ascensus data shows the number of employers funding employer contributions increased from 53% in 2013 to 81% in 2016, and data gathered from Strategic Insight finds the amount of employers contributions have increased from $108.1 billion in 2010 to $139.2 billion in 2016.

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An analysis by Ascensus, based on its daily valued book of business, finds a dramatic increase in the number of retirement plan sponsors who have chosen to fund an employer contribution for their 401(k) plans.

According to the data, 53% of plan sponsors funded an employer contribution in 2013. This increased to 55% in 2014, 69% in 2015 and 81% in 2016. According to Geno Cufone, senior vice president of retirement administration at Ascensus in Drescher, Pennsylvania, there are a of couple reasons so many plan sponsors didn’t fund employer contributions in 2013. But, one reason he offers PLANADVISER is that many reduced or eliminated employer contributions due to the 2008 financial crisis, and it took them a while to be able to do so again.

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“The real story is what has been happening in the past two years; the uptake in the market has definitely let more employers with the opportunity to make discretionary contributions take that up,” Cufone says. But, he also attributes the number of employers increasing employer contribution funding to the fact that they see how much employees are not saving enough for retirement and are taking action to increase participants’ retirement readiness.

He says Ascensus has seen a number of profit sharing contributions increase year over year especially. “We urge advisers to remind clients that if they are paying out bonuses because the company is doing well, they may want to make a profit sharing contribution if they have the opportunity to make a discretionary contribution, at least for some portion of the bonus,” he says, noting that the plan sponsor gets other benefits, such as tax breaks, or it may help with nondiscrimination testing.

Cufone adds that as knowledge about safe harbor plans increases, plan sponsors see relief from testing, and these plans require a certain amount of employer contributions. “Start up plans are more and more establishing safe harbor plans, but also augmenting benefits to employees drives decisions when establishing a plan,” he notes.

The Ascensus data is in line with data gathered from Strategic Insight, parent company to PLANADVISER. Department of Labor information shows employer contributions have increased steadily from $108.1 billion in 2010 to $139.2 billion in 2016.

Brooks Herman, VP of Data and Research in Strategic Insight’s San Diego office, attributes the rise in employer contributions to several factors: automatic enrollment (and auto escalation, to a lesser degree) becoming more and more prevalent, the country pulling out of the Great Recession giving participants the financial comfort needed to defer savings for retirement, and better education from plan sponsors and advisers to plan participants about the power of tax-deferred savings.

The Ascensus analysis also found a correlation between participation rates and the offering of employer contributions.

In 2013, plans that funded employer contributions had an average 7% higher participation rates than those that did not, while in 2014 plans with an employer contribution had 9% higher participation rates. In 2015, participation rates on average were 12% higher for plans with an employer contribution than for those without, and in 2016 participation rates were 19% higher.

Rather than an increase in the use of automatic enrollment, Cufone thinks the correlation is more about additional education plan sponsors and advisers are doing to incent participants to take advantage of free money. “Much of the increase in participation rates is attributable to this and to new plan creation,” he says.

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