2019 401(k) Plan Trends
Today we're going to be talking about 401(k) plan trends. After reviewing the Plan Sponsor Council of America survey that was recently released we thought we would go through it and add some color to what we're seeing out there with respect to 401(k) plans.
The first thing we're seeing is Roth availability. About 70 percent of plan sponsors today offer a Roth deferral option it and frankly we're seeing that employees get excited about the Roth feature and it really doesn't cost plan sponsors any money to offer a Roth from an administrative point of view there are some communication issues with respect to Roth but overall we're seeing plan sponsors add Roth as an option to the 401(k) plan.
Second thing we continue to see automatic enrollment increase but not as dramatically as we had in the past. About 60% of plan sponsors use automatic enrollment. The other big trend we've seen with automatic enrollment is almost 60% of plan sponsors today use a default deferral rate with automatic enrollment of higher than 3% - so anywhere between four and six percent is where we see most of those. There's been a lot of studies that have shown that if you offer a deferral rate of 6% the opt-out rate is about the same as it is for 3% so we're starting to see plan sponsors get a little bit more aggressive in getting employees to more realistic savings rates.
Another trend we're starting to see with respect to 401(k) plans is how fees are charged to plan participants. This means Record-keeping fees, advisor fees, audit etc. The most common way 10 years ago was as a percentage of plan assets or what we call basis points fee. Still about 42 percent of plan sponsors pay a basis point fee. About 38 percent today pay fees on a fixed dollar basis. Where they charge a you a fixed per head fee to employees. For example $25 per head.
The bigger trend we're seeing today is some sort of combination of this and the reason for the combination is if you charge a fixed dollar per head fee and you have automatic enrollment, for example, and you have low-wage employees that you're putting in the 401(k) plan - they're paying a bigger percentage of their account balance (at $25 per head for example) because they don't have a significant account balance yet. The basis point fee tends to charge a higher fee to those that have higher account balances. We're starting to see a combination where it may be paying five dollars per head per employee and the rest will be on basis points fee.
The other trend we're starting to see, which is not a good trend, is that there are more participants that have loans today. About 30 percent of plan participants have loans and the average a loan amount is up to about ninety-three hundred dollars. That's not a positive trend but that's a trend to be aware of.
Who Pays for Fees
Who pays for fees between the plan, the company or the plan and the company? It is really across the board we see most fees are paid for by the plan or the company or a combination the two. You look at the audit fees, about 61 percent of companies pay for audit plan fees outside the plan. Investment consultant fees it's about equal between plan and company.
A couple of them I want to just kind of give you a heads up on is communication to employees. We've recently picked up some project work – this employer recently had a Department of Labor audit. They had charged roughly three thousand dollars in communication fees to the plan that they allocated to participants. The DOL challenged those fees because those weren't directly related to the retirement plan. I think one of those sessions was related to women and investing and the other session was related to budgeting So when it comes to communication to employees, just realize the fees associated with those. The DOL may be looking out for those on plan audits.
Legal fees also. There are two types of legal fees you can have. One is what we call settler function and one is non-settler function.
Settler function fees are related to you making an amendment to the plan that's not required by the IRS. Like consulting the attorney about plan design changes, those are generally fees that cannot be charged through the plan.
A non-settler function fee would be a fee to amend the plan for an IRS required amendment. We often get a lot of questions about who pays for what plan fees.
Suggested Savings Rates
The other trend we are starting to see more and more of that really wasn't that big five years ago is suggested savings rates. About 30% of plan sponsors are suggesting targeted savings rates for employees. For example “think fifteen” or “think ten”. The way you want to look at this is if you have a matching contribution of dollar for dollar on five percent of pay you may want to offer a “think ten” strategy so if the employee contributes ten percent and they get five percent from the employer and they're getting closer to the fifteen percent target mark.
What can be kind of tricky about this is with your lower wage groups. If you do a retirement plan analysis for an employee in lower wage group they are actually required to save less money because Social Security in today's environment replaces a much higher income. So someone that makes thirty thousand dollars, for example, may only be required to save seven or eight percent of pay to be on track to replace a 80 percent income in retirement.
This is where we've seen one of the bigger changes out there in the last few years. On average 401(k) plan sponsors are putting more in the retirement plan for employees. The average is about 5.1 % of payroll is going into the retirement plan. In talking with clients, I think plan sponsor have come to realization that we've been paying more for health care over the years and it's kind of seen as a negative for employees because it's kind of a shared cost with them. They're allocating more resources to the retirement plan where it may be more of a positive perception.
Another trend we have started to see a little bit more of is using apps for all transactions. When you look at larger plan sponsors anywhere between 40 and 60 percent of large plan sponsors have fully functional apps on individuals phones that they can do transactions balance inquiry, signed up for the plan, etc. Over time we've really seen an increase in the employees that are have that availability and using that versus the phone center or even the internet.
The last trend is in company contributions. Five years ago the most common match for retirement plans was 50 cents on the dollar up to 6% of pay. Today actually the most common match is dollar for dollar on some percentage of pay. If you look at the averages here it would look like more dollar for dollar on 5%.
It’s a new year. 2019 is a good time to take a look at your plan, dust it off and make sure it's up to date!