Higher Participation Measured, Including in Roth Accounts

The steady increase in the use of the Roth 401(k) option comes as overall qualified plan participation continues to increase.

T. Rowe Price Retirement Plan Services’ annual benchmarking report of the plans it serves shows that, in 2019, plan participation was 79.6%.

This is up from 78.1% in 2018, Kevin Collins, head of T. Rowe Price Retirement Plan Services, tells PLANSPONSOR. The increase is largely because 61% of the plans for which T. Rowe is the recordkeeper use automatic enrollment, a rate that has increased by more than 2 percentage points from 2018 and 14 percentage points from 2013.

Collins says what is particularly encouraging is that 37% of plans automatically enroll their participants at a 6% or higher deferral rate.

“We hope that number will increase even further over time,” Collins says.

The findings also show that direct rollovers of plan assets increased to 76% in 2019, up from 74% in 2018. Collins also notes that participant usage of loans in 2019 decreased to 22.1%, down from a seven-year high of 24.9% in 2013.

However, Collins is quick to add, the Coronavirus Aid, Relief and Economic Security (CARES) Act permits participants affected by the coronavirus to take out loans as high as $100,000, so those figures could deteriorate.

“We recognize the financial strain of the coronavirus pandemic could have repercussions long after 2020,” he says. “We know that life evolves and priorities change, and we continue to see—now more than ever—the importance and significant impact plan design and financial wellness programs have on keeping participants on track with their financial priorities. The coronavirus has increased financial stress for individuals in 2020.”

The benchmark report also shows that the average account balance rose to more than $100,000, an increase of 8%, although over 34% of eligible participants did not contribute to their plans in 2019.

A similar phenomenon occurred in 2016, at which time T. Rowe took a deeper look to figure out why.

“The rationale probably would still stand, and the reason then was competing priorities,” Collins says. “It is a challenge for many people to save. We really try to provide holistic financial wellness tools to these individuals to help them deal with the challenges that keep them from saving.”

One other positive in the findings worth noting, Collins says, is the steady increase in the use of the Roth option. “More folks are thinking about the benefits of Roth options earlier in their careers,” he says. “It can be quite beneficial.”

A similar report, “How America Saves 2020,” from Vanguard, shows 99% of plans with automatic enrollment default participants into a balanced investment strategy—with 98% using a target-date fund (TDF). At the end of 2019, 62% of all Vanguard participants were solely invested in an automatic investment program—up from just 7% at the end of 2004 and 25% at the end of 2009.

Fifty-four percent of all participants were invested in a single TDF, 3% held one other balanced fund and 5% used a managed account program. Among those entering the plan for the first time last year, nearly nine in 10 were solely invested in a professionally managed allocation. Vanguard estimates that, by 2024, eight in 10 participants will be solely invested in an automatic investment program.

Ninety-four percent of sponsors offered TDFs at the end of 2019, up from 79% of plans in 2010. Ninety-eight percent of Vanguard participants are in plans offering TDFs, and 78% of participants use TDFs. Two-thirds of participants owning TDFs have their entire account in a single TDF.

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