401(k) Changes Leading to More Participation and Diversification
Changes in the 401(k) landscape have resulted in employee participation rates remaining high and leading to more diversification. Aon Hewitt reached these conclusions after analyzing more than 3.6 million employees eligible for defined-contribution retirement plans.
Participation rates in defined-contribution plans, such as 401(k) plans, remain at an all-time high of 76%. Plans that automatically enroll employees have an 83% participation rate—18 percentage points higher than plans without an automatic enrollment feature. Participation rates rose for workers in the 20 to 29 age bracket, but declined for those over the age of 30 who earn less than $60,000 per year.
The downside to automatic enrollment is that employees often do not increase their contribution amounts after enrollment. The average savings rate among workers subject to automatic enrollment is just 6.7%, half a percentage point below the average contribution rate for all workers (7.2%). Furthermore, 39% of automatic enrollees saved an amount below the threshold for maximizing their employer’s matching contributions, versus 25% for all other workers.
The average participant’s total plan balance was $74,380, but the median plan balance was $23,370. (The median number is more telling because it shows that half of all participants have a balance below $23,370. The number excludes savings outside of the 401(k) plan, such as rollover IRAs.)
More workers are using premixed portfolios, such as target date funds. The average allocation to premixed portfolios is now at 38%, up 13 percentage points over the past two years. The heaviest users are younger and lower-tenured employees. (Some plans have target date funds designated as the default allocation option.) The next two most popular asset classes are large U.S equity and GIC (guaranteed investment contract)/stable value at 13% each.
Only 15% of participants initiated a trade last year. This compares to 20% in 2008 and prior years. Even when those investors who exclusively invest in pre-made portfolios are excluded, trading activity is still low, at just 18% of all participants.
Source: “2012 Universe Benchmark Highlights: Measuring Employee Savings and Investing Behavior in Defined Contribution Plans,” Aon Hewitt.