A new study of millions of retirement plan participants shows that more workers are saving for retirement in the post-recession U.S., with millennials in particular benefiting from some of the new features of 401(k) plans.
- Jump to tips for plan sponsors: 6 ways to build effective 401(k) plans
- Jump to tips for employees: 6 things you can do today to boost your 401(k)
The five-year report is based on the activity in more than 5,000 employer-sponsored retirement plans that Wells Fargo manages. It offers the long view into saving behavior in the aftermath of the Great Recession, says Joe Ready, director of Wells Fargo’s Institutional Retirement and Trust business.
“One year is not a trend — but we think five years is, and we’re very encouraged by what we see from 2011 to 2016,” Ready says. “More and more, those entering the workforce and at the starting line clearly have developed the savings habit. That’s so important! Before you can reap the benefits of a plan and its features, you have to be enrolled and participate.”
The study is built around what Wells Fargo calls its Plan Health IndexSM, a percentage score that allows retirement plan sponsors to see:
- How many of their employees are participating.
- How many are contributing 10 percent or more (including the employer match).
- How diversified their investments are.
“While there’s no single action that’s going to put you on a path to a more secure retirement, and everyone’s situation is unique, we know those are the three things that can best prepare America’s diverse workforce for retirement,” Ready says. “The good news is that over these five years, we’ve improved Plan Health by 37 percent.
“We’re seeing across-the-board increases in participation (19 percent), contributions (7.3 percent), and diversification (26 percent) across incomes and generations,” he says. “The gains we’re seeing among millennials clearly point to the benefits of automatic enrollment and things like target date funds and managed account options that were nowhere near as available five years ago as they are today.”
Other findings from the report:
- Longer tenures equal better participation and more saving. The utility industry, known for its low turnover, bested all others on Plan Health. It has the highest average tenure of any industry, at 13.8 years, and the highest participation rate at 90.7 percent.
- Automatic enrollment and auto increase features work best together. When employers set the default contribution rate higher than the minimum and pair that feature with automatic increases, they can boost participation and get participants closer to the recommended 10 percent goal faster.
- Higher employer matches produce better participation. For example, plans without automatic enrollment had 64.6 percent average participation with an employer match of 6 percent or more versus 56.3 percent when it’s 3 percent to 6 percent, and 48.7 percent for matches of less than 3 percent.
Boomers have bigger balances, but millennials are more on track
The study shows that while baby boomers still save more and contribute higher percentages to their retirement plans, millennials are quickly gaining ground and are actually ahead of their older peers in some measures.
For example, millennials are on track to replace 78 percent of their income at retirement versus 62 percent for Generation Xers and 51 percent for baby boomers.
Millennials also are the largest users of Roth 401(k) deferrals; they had the biggest percentage jump in plan participation of any group — 32 percent. And they are the most diversified in their investments, the study found.
But baby boomers still contribute the most — 8.7 percent, compared to 6.8 percent for Gen Xers and 5.8 percent for millennials. Baby boomers also have the biggest balances — even as they face the headwinds of slow economic and wage growth, and as health care, housing increases, and other costs nearly stifle median household income growth.
Challenges for reaching retirement goals
Even with all the good news, one report finding shows the challenges facing the industry and savers. From 2011 to 2016, the 7.3 percent increase in plan participants contributing the recommended 10 percent of their income represented slow year-over-year growth.
“We know how hard it is to save, and all the challenges people face, whether it’s now caring for an aging parent or paying off student debt or other challenges,” Ready says. “But using tools like our My Money MapSM or simply taking stock a couple of times a year and comparing what’s going out and what’s coming in can help identify ways to cut in some areas of discretionary spending to put away more. Our industry needs to continue to stress the importance of moving, step by step, to at least 10 percent.”
For the complete findings, including steps plan sponsors can take to help participants save even more for retirement, read the full report, Driving Plan Health (PDF). (Update: For a national view of retirement savings by current workers and retirees, see the Oct. 11 news release about the 2016 Wells Fargo Retirement Survey results.)
6 ways to build effective 401(k) plans
By Mel Hooker, head of Relationship Management at Wells Fargo Institutional Retirement and Trust
Each day, my team works alongside thousands of employers to help millions of people — their employees — prepare for retirement. We’re like retirement coaches helping people get financially fit.
When it comes to physical fitness, there are the things we can control – what we eat and how much we exercise — and what’s not so easy to control: our genetics and aging bodies.
Likewise, when it comes to retirement fitness, plan sponsors who design 401(k) plans must know what they can and can’t change to best prepare employees for retirement. Our new Driving Plan Health report (PDF) may help you make these decisions; it highlights best practices based on five years of data (from 2011 to 2016) on the daily actions of 4 million retirement plan participants in every retirement plan we manage.
Here are some of the most important things you can do to build a well-designed retirement plan:
- Know your audience. Employee demographics matter when planning effective retirement plans. Employee savings behaviors vary by age, tenure, salary, turnover rates, and other factors. The more tenured an employee base, our research found, the higher the participation rates. We also saw that younger and less tenured employees are more likely to satisfy the diversification goal, possibly a result of being defaulted into their plan’s Qualified Default Investment Alternative.
- Establish specific goals for specific populations. Each group should have its own set of goals in three areas: participation, contribution, and diversification. For example, in an industry where turnover is high in the first years of employment — such as retail — you might offer voluntary enrollment based on the plan’s eligibility requirements and delay the automatic enrollment feature until an employee reaches a tenure milestone, such as one or two years of service. Our study shows that participation increases significantly once an employee has been at work between two and nine years. A company with less turnover and more tenured employees might, on the other hand, implement auto enrollment 30 days after employment begins.
- Take stock of where you are. As our report suggests, plan design matters, but implementation matters more. Let’s assume, for instance, that one of your goals is to help employees maximize their deferral rate (the percentage amount they set aside from each paycheck) so that they’re saving at least 10 percent of income, including their employer’s match. We know that saving a minimum of 10 percent is ideal, and that beginning at an early age increases the odds of reaching that mark. So what do you do if a plan has mid-career and near-retirement employees who aren’t there yet? Perhaps you can start people at a higher deferral rate as a default (say 6 percent), and then utilize auto-contribution increase rates of 2 percent. That could help an employee get to 10 percent in only three years instead of eight!
- Make enrollment automatic for all employees. Participation eclipses 80 percent when retirement plans offer automatic enrollment. Consider enrolling all employees — including new and nonparticipating employees — at a 6 percent default deferral rate. That’s a best practice we’ve found that results in an average participation rate of 84 percent!
- Add “opt-out” to automatic increases. An opt-out feature means the employees must act to stop the percentage of their pay that goes to their 401(k) plan from automatically increasing every year. Using an opt-out function as a default, we’ve found, retains 79 percent of employees in the program.
- Provide more target date funds and managed savings options. Many participants struggle with adequate diversification on an ongoing basis. One way to address this problem is to include options like target date funds or managed accounts, which develop portfolios appropriate to the investor’s target retirement date. They also leave asset allocation and other management tasks to the pros, instead of participants.
Like any good fitness coach, we know that every step matters. We’re seeing plenty of hard work paying off, based on our Plan Health Index.SM This percentage score allows retirement plan sponsors to see how many of their employees are doing the three things that best predict a good retirement savings outcome: participating, contributing 10 percent or more (including the employer match), and having a diversified investment portfolio.
6 things you can do today to boost your 401(k)
By Joe Ready, director of Institutional Retirement and Trust for Wells Fargo
Our recent analysis of how U.S. workers have been saving for retirement over the past five years tells me we’ve come a long way – but that there’s also room for improvement.
Our Driving Plan Health report (PDF) — which is designed to help employers understand the ways they can help their employees save for retirement — tells us that more people than ever are participating in their company-sponsored retirement plan. It also tells me that more people are trying to diversify their 401(k) investments, which helps keep participants from being overweight in any one sector and can decrease the risks to their balances from sector declines.
However, I’d like to see the numbers move up on deferral rates — the percentage that people and their employers put into their 401(k) plan with each paycheck.
We recommend that you save enough for retirement to replace at least 80 percent of your income. Regardless of where you are on your retirement savings path, here are six steps you can consider taking today toward better retirement health.
- Start saving today. Pay yourself first, and defer as much of your salary as you can on a pre-tax basis. If you have the option to join your employer’s 401(k) plan, enroll today. You may defer savings at a pre-tax rate up to $18,000 per year; participants age 50 and older can make up to $6,000 in additional catch-up contributions each year.If you do not have access to a workplace retirement plan, you can set up an automatic savings program and make systematic contributions — up to $5,500 if you are under age 50, or $6,500 if you are age 50 or older — through regular contributions to a Roth IRA (with after-tax dollars) or a traditional IRA (with pre-tax dollars), if you meet eligibility requirements. Establishing an automated routine supports regular, consistent saving habits.
- Get the company match, if it’s offered. If you are contributing to a 401(k), find out if there’s a company match. If there is, make sure you’re taking full advantage of it. Remember that the money your employer contributes on your behalf can be added to the amount you’re contributing; combining the two contributions helps give your overall savings a boost.
- Increase your rate of savings. Research shows that the No. 1 factor in saving for retirement is your contribution rate, which includes increasing your contribution rate on a regular basis. Find out if your employer’s plan offers the option to increase your contribution amount automatically and on a regular basis. That’s one less thing to remember and it’s an easy way to help you gradually save more in preparation for retirement. You can always change the increase rate or the limit for your automatic retirement plan contributions.
- Find out what type of investor you are. The way you divide your investments among the three basic investment categories — stocks, bonds, and stable value investments — is called your asset allocation. Your asset allocation is the big picture. Knowing your investor type — conservative, moderate, or aggressive — can provide a good starting point for determining which asset allocation makes the most sense for you. Use an online tool like the Wells Fargo Risk Tolerance Quiz1 to help you determine your risk tolerance.
- Make sure you’re diversified appropriately. This is sound advice whether you have a 401(k) plan or another type of investment vehicle. Diversification is among the three key factors that can have a huge impact on whether you will have adequate income replacement in retirement.
- Leave your savings alone. It may be tempting to spend your savings if you change jobs or if an unexpected expense pops up, but it is important to keep these assets growing in a tax-favored retirement account. Withdrawing money from your employer-sponsored plan can erode your retirement savings to the point where you may jeopardize your financial security in retirement. Keep your money working for you!
1 This information and any information provided by employees and representatives of Wells Fargo Bank, N.A. and its affiliates is intended to constitute investment education under U.S. Department of Labor guidance and does not constitute “investment advice” under the Employee Retirement Income Security Act of 1974. Neither Wells Fargo nor any of its affiliates, including employees, and representatives, may provide “investment advice” to any participant or beneficiary regarding the investment of assets in your employer-sponsored retirement plan. Please contact an investment, financial, tax, or legal advisor regarding your specific situation.
Conducted by Wells Fargo’s Customer Insights and Analytics team, the Driving Plan Health report (PDF) represents the experience of 4 million retirement plan participants from second quarter 2011 to second quarter 2016.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.