Is the Adoption of Innovative Plan Features Finally Leveling Off?

New data from the Plan Sponsor Council of America (PSCA) shows that after years of increases, the adoption of certain provisions by employer-sponsored retirement plans may have leveled off.

After years of steady increase, according to PSCA’s 62nd Annual Survey of Profit Sharing and 401(k) Plans, the longest running survey of its kind, plan sponsor adoption of automatic enrollment features, Roth options, and target-date funds may be leveling off. Each of those features received considerable attention following passage of the Pension Protection Act of 2006 (PPA), which eliminated the sunset on Roth features and provided fiduciary relief and plan design guidance.

“These features have seen significant uptake over the last 10 or so years and they have succeeded in helping to boost plan participation, employee contribution rates, employer financial support, and investment diversification, which, in combination, have resulted in increased account balances,” said Research Director Hattie Greenan. “But plans are not a one-size-fits-all approach – one of the key features of 401(k) plans is the ability for the employer to customize the plan to their specific employee group(s) and benefit needs. Make no mistake, while these features have been added by the majority of surveyed plans, not every plan sponsor has or will adopt these innovations.”

Automatic Enrollment
Automatic features include enrollment (typically when an employee joins a company), escalation and investment.

For plans that haven’t adopted automatic enrollment, the number one reason (stated by more than half) is that they are satisfied with participation rates.

“It isn’t surprising that we’ve reached a plateau regarding adoption of automatic features,” said Jack Towarnicky, Principal Researcher. “Plan sponsors have had more than a decade to consider the appropriateness of such features for their plan. Given the resulting improvement in participation and contribution rates by the plans who have adopted these features, auto features look like they are here to stay.”

Roth
It took less than 15 years for Roth 401(k) provisions to become commonplace. Today the Roth option is offered in a super-majority of 401(k) plans. While the percentage of surveyed plans offering Roth features has slowed recently, the percentage of workers contributing to their plans on a Roth basis continues to increase – 23% in 2018, up from 15.6% in 2008. Roth 401(k) may be a more valuable option compared to pre-tax 401(k) contributions for some participants, but not all. However, for plan sponsors, there typically are no identifiable financial benefits to adding Roth 401(k) features sufficient to offset the added cost and complexity in administration and communication.”

Target Date Adoption
Target date fund (TDF) availability and usage is tied to the increased deployment of automatic features. Today, 70% of plans have adopted a Qualified Default Investment Alternative, or QDIA – and most (75.1%) plan investment fiduciaries that have adopted a QDIA have selected a TDF to fulfill that role. “As a result of automatic features and QDIAs, TDFs are now the most frequently used investment in 401(k) plans,” Greenan explains. “TDFs now account for 20.7% of plan assets, while ten years ago, only 5.1% of plan assets were allocated to TDFs. So, even if slightly fewer plans are offering TDF investments, we should expect to see continued growth in participants’ allocations to these funds, or to comparable offerings, such as managed accounts.”

Looking Ahead
“While some plan sponsors may assert that there is no ‘best practices’ design for retirement savings plans, I would assert that offering informed choices -- target date vs. specific investment options, Roth and Pretax contributions and automatic enrollment are best practices,” Towarnicky concluded. “The proof is in the significant improvement in both participation and contribution rates over the last ten or so years.”

About the Survey
The 62nd Annual Survey of Profit Sharing and 401(k) Plans, the longest running survey of its kind, also covers topics such as monitoring investment policy statements, alternative investment options, company stock, distribution and withdrawals, participant education and communication, recordkeeping and other plan administration practices. The report includes a comprehensive executive summary that examines the 10-year trends of key plan benchmarking data points. To connect with Research Director Hattie Greenan about the survey’s findings, contact her at [email protected]. PSCA’s 62nd Annual Survey reflects the 2018 plan-year experience of 608 DC plan sponsors. For more information or to order a copy visit: https://www.psca.org/62nd_ASReport