The current average 401(k) participant deferral rate is 7.2%, and that is simply too low, according to Joe Ready, director of institutional retirement and trust at Wells Fargo.
Average deferral rates have been flat over the past three years, according to an analysis of data from 3.9 million 401(k)-eligible employees at companies for which Wells Fargo provides 401(k) plans. The number of participants contributing at least 10% (including company match) has increased by less than 3%, from 34.6% in the fourth quarter of 2011 to 37% in the fourth quarter of 2014.
The stagnant contribution rates could be improved with automatic deferral increases for participant contributions to their 401(k)s, but the data suggests participants should be automatically enrolled in an auto-increase feature and not required to sign up for it. When assigned an automatic increase, only 31% of participants opt out, however, when participants are required to sign up for an auto-increase on their own, a mere 2% opt in, according to Wells Fargo.
“Of all the behaviors 401(k) participants can do to improve their retirement outcome, this is the area with the least improvement but with potentially the greatest impact,” says Ready.
He adds that it is important to educate participants about the need for diversification of the 401(k) investments, an area in which Wells Fargo has seen an increase in the number of participants who meet the minimum level—two equities and a fixed-income fund or a managed investment product, and less than 20% in employer stock. “Appropriate diversification is an essential strategy for weathering the ups and downs of the stock market,” Ready says.
According to Wells Fargo, participants are moving out of fixed-income investments and into managed investment products, mostly target-date funds (TDFs). Nearly three-quarters (74.9%) have money in some sort of managed product, and 61.3% have money in a target-date fund, specifically. Among currently active participants who use the funds, 40% have only part of their money in those products.
“There are two big ways plan sponsors are helping participants diversity at present,” Ready tells PLANSPONSOR. “The first is to use a diversified investment, such as a target-date fund, as the default investment [for the plan].” The rising diversification of participants over the past few years has been primarily fueled by this tactic, as many people are willing to go with whatever defaults are set up in a plan, he notes.
The second strategy for helping participants diversify 401(k) investments is to offer an investment advice product. “That way, participants who did not get defaulted into a managed investment product, or those who want asset allocation more closely tailored to their needs and risk tolerance, can get guidance on how to use a plan’s funds to meet their investment needs,” Ready says.
Wells Fargo released data from its participant base in anticipation of America Saves Week, February 23 through 28.