More 401(k) Plans Adopting 6% as the Default Deferral Rate

The industry standard of 3% is finally being challenged

As of year-end 2015, 38.2% of 401(k) plans with automatic enrollment are deferring 3% of participants’ salaries—but 29.0% are deferring 6%, T. Rowe Price found by analyzing its recordkeeping data.

Another 13.0% are deferring 4%, and 10.9% are deferring 5%. Just more than half, 51%, of the plans T. Rowe Price administers use automatic enrollment, a 28% increase since 2011.

T. Rowe Price also found that plans with automatic enrollment have an 88% participation rate, compared to 48% of plans where it is up to participants to take the initiative to opt into their retirement plan. Nearly all, 96%, of plans with automatic enrollment use target-date investments as the default, and 50% offer a Roth 401(k), up 49% since 2011. Furthermore, 40% of plans match 6% of participants’ contributions.

“We are pleased that our plan sponsor clients are continuing to elevate the industry standard by auto-enrolling participants at 6% versus the more typical 3%,” says Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, Inc. “Higher default contribution rates encourage employee participation in plans and will lead to better outcomes.”

However, it is not all good news. The average deferral rate for the plans that T. Rowe Price administers is 7%, well below the recommended 15%. Furthermore, the average loan balance increased for the seventh straight year to $9,075, and the percent of people taking out loans has held steady at 24%. In addition, nearly half, 47%, of sponsors permit people to take out two or more loans.

When switching jobs, 82% of people younger than 20 and 45% of those between 20 and 29 cashed out of their 401(k). “Since those plan account balances may seem insignificant to participants, sponsors should look to reinforce the potential value of this money,” T. Rowe Price says. “Targeted communications for new, younger employees could help create awareness of the effect cashing out has on long-term savings growth.”

Since 31% of participants in the plans that T. Rowe Price administers do not contribute to their 401(k), the firm recommends that sponsors offer financial wellness programs, so participants can get their financial houses in order to be in a better position to contribute to their workplace defined contribution plan.