401(k) Participation Up 19% From 2011: Wells Fargo

The good news: More 401(k) plan participants are making better decisions for the future.

The bad news: There is still much room for improvement.

A new report analyzes five years' worth of behaviors among the 4 million participants in 401(k) plans administered by Wells Fargo to determine how and why their saving patterns have changed.

The Driving Plan Health 2016 report looks at the three key behaviors that help participants reach their financial goals for retirement — participation, contribution rate and diversification.

Wells Fargo also examines three demographic trends that play an important role in retirement savings: How much an employee is earning, how long the employee has been employed by the sponsor and the employee's age.

Participation

Participation in 401(k) plans is climbing. The report finds participation has increased by 19% in the last five years.

Boomers have the highest participation rate, currently at 65.9% and up from 57.2% in 2011. Millennials and Gen Xers have also gained ground in their participation rates over the last five years as well. Gen Xers today have a participation rate of 63.5%, up from 51.8% five years ago. Meanwhile, millennials currently have a 59.2% participation rate, up from 44.8% in 2011.

Participants with longer tenures also have better participation rates, the report finds.

"The alignment between tenure and participation happens for a variety of reasons — from workers realizing saving for retirement is important as they age to ongoing exposure to the plan and its benefits," the report states.

Perhaps not surprisingly, the report also finds that income matters. The higher the income, the more likely the employee is participating. But the study finds that workers across all income levels are participating at higher rates.

Among those earning $100,000 or more, participation went from 73.6% in 2011 to 81.4% in 2016 (a 10.6% increase). Meanwhile, for participants earning less than $20,000 per year, participation went from 30.6% in 2011 to 47.9% in 2016 (a 56.5% increase).

The study finds that automatic enrollment is a key driver in increasing participation.

According to Wells Fargo, plans that have implemented automatic enrollment at a 6% default deferral rate average 87% participation, plans with automatic enrollment at a 3% default deferral rate average 83% participation, whereas those without automatic enrollment have a 48% participation rate.

Contribution rate

The report finds that contribution rate is the slowest moving category with a 7.3% increase since 2011.

"Unlike health benefits, most employees are not required to confirm or update their retirement plan elections on an annual basis, so many people stay at the same contribution level year after year," the report states.

Wells Fargo recommends at least a 10% contribution rate, including participant deferrals and any employer match or contribution.

As with participation, longer tenures attributed to higher contribution rates, which Wells Fargo says could be in part due to auto-increase programs as well as ongoing exposure to the plan.

Age also helps participants reach a 10% contribution rate, although the study finds that more younger people are also reaching that goal.

According to the report, boomers have the highest percent of participants contributing 10% or more — currently 44.5%. However, the percentage of millennials and Gen Xers reaching the 10% goal has increased more over the last five years, with the former increasing by 23.8% and the latter by 18.5%.

And, while income is a factor in reaching the 10% contribution rate goal, the study finds that workers earning less than $20,000 had a higher percentage of participants meeting the 10% goal than workers in the $20,000 to $39,000 income range.

The report found that plans that offer a total match had more participants reaching the 10% contribution rate. Plans that offer a fixed match average about 46% of their participants reaching the 10% contribution goal; plans that don't offer a fixed match have only 27% of participants meeting the contribution goal.

Diversification

The report also looks at how participants are investing their contributions.

"Lack of diversification — whether its having 100% in a stable value fund or an extremely aggressive emerging markets fund — could have an adverse impact on participant outcomes," the report states.

According to the report, diversification has continued a steady climb over the last five years with an "impressive" 26.2% increase.

Wells Fargo considers a participant to be "diversified" if the participant has either a minimum of two equities and a fixed fund or an asset allocation fund such as a target date fund, and less than 20% in employer stock.

According to the report, younger and less tenured employees are more likely to satisfy Wells Fargo's minimum diversification goal in their 401(k). This is "most likely due to being defaulted into the plan's default investment such as a target date fund or managed account," the report says.

The report also finds that higher income does not mean better diversification – approximately 82% of participants on the lower end of the income scale meet the diversification goal while 78% on the higher end do.

What can improve diversification among participants? The report finds that plans that have a qualified default investment alternative (QDIA) have more participants that meet the diversification goal.

According to Wells Fargo, 84% of plans have a QDIA and, of those, 82% use either a target date fund series or managed account program as their QDIA.

And the report finds that only 37% of participants meet the diversification goal within the plan when not invested in the QDIA.

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