The Silent 170k – Boosting Employee 401k Plan Contributions

 

Out of the more than 1.4 million participants who were eligible to defer retirement plans at T. Rowe Price throughout all of 2016, 69,850 contributed $50 or less. This means that at some point in 2016, they may have deferred part of their salary but stopped contributing—and may have stopped engaging with the plan altogether. So how can we help improve 401k plan contributions?

Demographics don’t appear to play a role in 401k plan contributions.
The breakdown of age groups within the Silent 170k—shown below—closely resembles that of other participants, and they’re from regions across the country. Over half of the population (51%) has less than $10,000 in plan account assets. The Silent 170k are also more likely to have a high tenure in the plan.

• They’ve always saved less, and rates are dropping. Last year, the vast majority of the Silent 170k made no contributions—far less than the $5,366 the average participant outside this group  contributed.
• They’re less engaged across the board. In 2016, the Silent 170k connected with T. Rowe Price less than other participants across all channels (Web, phone, email, etc.). For example, in 2016, only one in four opened an email from T. Rowe Price, and of those, only 5% clicked on a link within the email.
• When they restart their savings, it’s often at a lower rate. Although some in the Silent 170k restart their contributions, their contributions tend to remain below other participants’. Over the past few years, the Silent 170k had an average contribution of $260 per pay period compared with $540 for other participants.

Participants disengage for a wide variety of reasons, most of which we cannot clearly determine by looking at data alone. However, over the years, T. Rowe Price has learned that changing employee behavior for the better requires a combination of service offerings that motivate employees and make it easy to take action:

Plan design features have demonstrated positive results in changing participant behavior in many plans. This is true even for disengaged participants. As demonstrated earlier, only 1% of the Silent 170k opted out of their plan’s autoenrollment feature in 2016 compared with 11.6% of all participants. Plans without auto-enrollment had the highest percentage of participants in the Silent 170k population compared with plans that have auto-enrollment. Many plans at T. Rowe Price have adopted features designed to help drive positive outcomes for participants.

Auto-enroll
■■ Enrolls participants in the plan automatically
■■ Can help increase average participation and deferral rates in the plan
In the nearly 55% of plans with auto-enrollment, the average plan participation rate is 88% compared with a 46% rate in plans without auto-enrollment. The average deferral rate in auto-enrollment plans appears to be increasing from the 3% industry standard. In 2016, more than 33% of plans had a default deferral rate of 6%.

Company match
■■ Encourages participants to increase deferrals by revising contribution formulas
Revising the company match formula can incentivize participants to save more to get the full company match (e.g., changing the formula from 100% on first 3% to 50% on first 6%). At T. Rowe Price, employer match types are diverse, but we see most plans opt for a fixed percent (48% of plans), for example, matching 50% up to the first 6% (32% of plans).

Auto-increase with opt out
■■ Enrolls participants automatically for annual increases of the deferral rate (as opposed to the voluntary “opt in” approach)
Plans that automatically enroll participants in auto-increase average a 66% adoption rate, meaning that only 34% of participants opt out of the saving feature. In comparison, the adoption rate drops to 12% in plans that require participants to opt in to the auto-increase feature.

As previously stated, the Silent 170k have a track record of saving less than the other plan participants—their average annual contribution was just over $4 compared with the $5,366 other participants contributed, according to T. Rowe Price data. This dramatically low contribution was driven by the 130,000+ participants who did not contribute 2016.

When participants restart deferrals after stopping, their new deferral rate tends to be lower. For example, so far in 2017, the Silent 170k have deferred an average of $122 per pay period—a vast improvement from 2016 but a 50% decrease from 2015, when they contributed an average of $246.1

While we cannot determine why a participant chooses to stop contributing, low savings and participation rates could indicate that participants are facing immediate financial challenges that restrict their ability to save for the long term.

One potential solution is to implement a strong financial wellness program that motivates employees to overcome the barriers that prevent them from building their financial foundation.

 

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