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.
“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.