With traditional pensions going the way of the dinosaurs, defined contribution plans are now the primary vehicle of America’s retirement system. Researcher Brightscope calculates that 401(k) assets totaled $4.9 trillion in June 2016.* Combined with other self-funded retirement plans such as IRAs, defined contribution plans accounted for 59% of all retirement assets. The switch from pensions to 401(k)s has been so thorough that 73% of employed workers reported they were offered a defined contribution plan by their employer.
So with all these 401(k) plans holding so many assets, how can we wrap our heads around the industry? We’ll give that a shot by presenting some key 401(k) stats from 2016 that we believe provide a snapshot of the state of the industry today (and may surprise you!). Let’s start off with the most important statistic of them all:
401(k) Stat #1: 79%
That’s the participation rate. At least that’s the participation rate for plans where fund giant Vanguard is a service provider – probably a good proxy for the industry. But behind that 79% figure are some very different numbers. In plans offering automatic enrollment, Vanguard finds that a whopping 90% of eligible employees join the plan. The figure plunges to 63% in plans without auto enrollment.
This discrepancy is even wider for young employees. The participation rate is 85% for those below the age of 25 – if they are auto enrolled into the company plan. The participation rate falls to 27% if they have to enroll themselves.
|**Participation Rate by Age and Plan Design**|
|**Voluntary Enrollment**||**Automatic Enrollment**||**All**|
401(k) Stat #2: 6.2%
The average deferral rate was 6.2% according to the same research from Vanguard. This was down from 6.9% in 2015. Why? More automatic enrollment. That’s the Catch-22 of auto enroll. If the initial deferral rate is set very low, say 2% to 3% of salary, simple inertia will cause employees to leave their contributions at a lower rate than they might otherwise. These low automatic deferral rates place downward pressure on employee contributions.
The good news for employees is that these deferral rates are converging. Participants who joined a plan under automatic enrollment had an average 6.1% deferral rate in 2016 compared to a 6.3% rate for those who joined with voluntary enrollment. This convergence is likely driven by auto escalation policies already in place.
401(k) Stat #3: 22
That’s the average number of investment options offered by 401(k) plans in 2014, according to BrightScope, (This figure considers a suite of target date funds as a single investment option.) This average number of investment options was fairly consistent regardless of plan size. And despite the various permutations of mutual funds over the last decade, the number of investment options has remained relatively unchanged since 2006.**
401(k) Stat #4: 0.39%
Large plans tend to pay much less for their investment line-up than smaller plans. The BrightScope research found that the average expense ratio was 0.39% for domestic equity funds in plans with more than $1 billion in assets. The expense ratio was much higher for plans with $1-$10 billion in assets, coming in at 0.82%. Sometimes a difference in “share classes” can account for part of that variation. While the underlying investments may be identical, smaller plans may find that only the higher cost share classes are available to them. One way to include low cost funds in the line-up is to offer passively managed alternatives. Actively managed funds are almost always more expensive than passive funds, and the record shows that these higher expenses are rarely justified by superior performance. (For more on fund expenses see our blog post, “The 401(k) expense ratio.”)
401(k) Stat #5: 0.97%
Because investment expenses account the majority of 401(k) expenses, it’s no surprise that large plans incur lower total relative plan costs than small plans. BrightScope puts 2014 average total plan cost at 0.97% of assets. Because a few plans account for a disproportionate amount of assets, the average participant experienced a total plan cost of 0.55% of assets. The bottom line is, smaller plans are typically more expensive to run. It’s important to monitor 401(k) costs, not only to fulfill your fiduciary obligations, but because small differences in expense ratios can cost thousands of dollars in forgone retirement savings down the road.
401(k) Stat #6: 97%
Vanguard’s research into 401(k) plans includes considerable information on the use of target date funds. 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, 97% 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.”
401(k) Stat #7: 38%
According to research by Fidelity Investments, 38% of plan sponsors are looking to hire a new advisor. That’s the highest percentage since the survey began in 2008. Important reasons for considering a new advisor include the desire to have someone knowledgeable around who can provide more comprehensive employee education. Fiduciary duties were the number one concern cited when looking for an investment advisor for the company’s 401(k).
When it comes to finding an advisor for your company’s 401(k), it can be difficult knowing even where to start. That’s why we at ForUsAll have put together some tools to help you through this process.
*The Brightscope/ICI Defined Contribution Plan Profile: A Close Look at 4019k) Plans, 2014.
**The BrightScope data is based on IRS Form 5500 filings by private sector defined contribution plans with audited financials. These are generally larger plans, those with more than 100 employees. Brightscope supplements this data with information from outside sources on investment expenses.