With traditional pensions going the way of the dinosaurs, defined contribution plans are now the primary vehicle of America’s retirement system. The Investment Company Institute calculates that 401(k) assets totaled $29.2 trillion as of September 30, 2018.
With traditional pensions going the way of the dinosaurs, defined contribution plans are now the primary vehicle of America’s retirement system. The Investment Company Institute calculates that retirement assets totaled $33.6 trillion as of December 31, 2023. Combined with other self-funded retirement plans such as IRAs, retirement assets now account for one-third of all household financial assets. The switch from pensions to 401(k)s has been so thorough that 50% of all workers now have access to defined contribution plans.
The 401(k) is clearly a core component of a good benefits package - but it’s not so easy to tell if your plan is healthy. So if you offer a 401(k), the following facts are going to be of real interest to you (and your HR team). These snapshot statistics provide a basic industry benchmark to help you decode and evaluate 401(k) plan performance.
That’s the participation rate for 2022, according to the latest survey by Vanguard. That’s great! But what’s to account for these high participation rates?
Some of the credit goes to the rise of automatic enrollment. Vanguard also found the use of automatic enrollment hit new highs with 58% of plans offering the feature.
If you’re curious about how to boost employee participation at your firm, we’ve written extensively on the topic.
The average deferral rate is 7.3% according to Vanguard.
When a plan uses auto-enrollment, these default rates are often initially set very low, around 3%. Sometimes, simple inertia causes employees to leave their contributions at a lower rate than they might otherwise. These low automatic deferral rates place downward pressure on employee contributions.
However, as auto-enrollment becomes the norm, deferral rates are beginning to rise.
That’s the average number of investment options offered by 401(k) plans is between 8 and 12, according to FINRA. As people become more comfortable with automation, the popularity of automatically-adjusted funds is also rising. 77% of 401(k) participants are invested in target-date, aka “set and forget” funds.
Time to talk fees. In the past, larger plans paid less for their investment line-up than smaller plans. Now, fees are becoming more equitable for SMBs. Hooray!
As always, you can expect 401(k) expense ratios to range from 0.3% to 2%. However, fund managers like Vanguard, and Fidelity are offering low comprehensive expense ratios at 0.02 - 0.03%.
If you’d like to learn more about expense ratios, check out our post, “The 401(k) expense ratio.”
All-in fees have a wide range from 0.2% to 5%, though recent studies found the average all-in-fees to be 2.2%.
Naturally, these fees can be quite a bit higher than those for the bigger plans, although the discrepancy can get unreasonably high. The bottom line is, smaller plans are typically more expensive to run. For example, 401(k) Specialist found that small plans with $5 million in assets costs 1.24 %, while the plans with $50 million in assets is 0.93 %.
However, if you’re a small to medium there is good news! The 401(k) specialist also found that investment fees continue to decline for most plan sizes. With fee compression becoming more popular, you can likely expect to see your fees actually decrease.
Vanguard’s 2022 research into 401(k) plans includes considerable information on the use of target date funds (TDFs). These funds are designed to handle the participant’s changing risk preferences over time by reducing the equity allocation over time. This investment approach has gained considerable popularity over the last decade or so.
In fact, 95% of Vanguard participants belong to a plan where target date funds are available. Because the target date fund is designed to be a balanced account, many investors have but a single target date fund as their investment option. But not all target date funds are equal. It’s important to know if a target date fund’s costs include only the expenses of the fund components, or if an additional fee is tacked on as well. For more on target date funds check out our blog post, “TDFs and 401(k)s.”
According to research by Fidelity Investments, 47% of plan sponsors are looking to hire a new advisor. For sponsors looking for a new advisor, the found three key reasons why sponsors are looking:
However, in addition to wanting more education, Sponsors were also looking to advisors to help with the investment selection and monitoring, which can help significantly reduce employer fiduciary liability.
As a sponsor, are you looking for more support in these three areas? Finding the right advisor can really benefit you and your employees, and in many cases can reduce your plan costs. ForUsAll addresses these three reasons by offering additional tech solutions to help solve these problems.
That’s why we’ve created a simple 401(k) Provider Comparison Checklist for you to easily find the right advisor for your business.
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
Give your employees more than just a 401(k), join the movement.
