A new report from Wells Fargo Institutional Retirement and Trust details the specific features of a well-designed 401(k) plan that are most effective in helping employees amass the savings they need to replace 80 percent of their income in retirement.
For the report, 2018 Driving Plan Health, Wells Fargo Institutional Retirement and Trust analyzed more than 2,000 401(k) plans representing more than 4 million eligible employees in a range of industries. (Refer to the report for complete methodology information.) The company found 16 features that are most effective and high influence plans use a combination of the 16 to launch employees on the path to replace 80 percent of their pre-retirement income once they retire.
When U.S. workers are saving in 401(k) plans that have the right combination of features, we believe they have a significantly better chance of amassing the savings they need to retire comfortably, said Mel Hooker of Wells Fargo Institutional Retirement and Trust. While saving and investing for retirement fall primarily on individuals, we also found that the way businesses design their 401(k) plans for employees can dramatically influence the decisions people make in preparing for retirement.
Wells Fargo Institutional Retirement and Trust created Influence Factor ratings for all of the 401(k) plans it administers to measure the degree to which plan design incorporates key features that influence things like plan participation, overall saving, and investment diversification. Of the 16 features that exert influence, four seek to generate the most positive outcomes:
- Automatic enrollment, with a default of 6 percent or more going to the 401(k) and automatic annual re-enrollment.
- An opt-out option to increase the default to a rate of 10 percent or higher.
- Diversified investment offerings, such as a target-date fund.
- An above-average company match of at least 5 percent, or profit sharing.
When used together, these features address the psychological barriers, or inertia, that tend to get in the way of a persons path to a well-funded retirement, said Hooker. Our research shows that effective plan design helps render better outcomes for employees. When plans are built with the right features, employees have a much better shot at building the savings they need for retirement, said Hooker.
Among the plans analyzed by Wells Fargo Institutional Retirement and Trust, 10 percent are deemed to be high influence, plans in which workers are on a closer path to 80 percent income replacement, which is optimal. Participants in Wells Fargo high influence plans have a 64 percent income replacement compared to participants in a low influence plan whose average income replacement falls to 48 percent.
High influence plans are not concentrated in any one industry. Our research shows many U.S. businesses can and do institute plans that have positively influenced employee behavior. Yet even those companies with the highest influence scores can make small changes that have a big impact, Hooker added.
For high influence plans, the participation rate is 89 percent, 55 percent of employees are contributing 10 percent of more (including match), and 88 percent are appropriately diversified.
We want employees to be in their 401(k) plan, but participation alone is not enough. People have to raise their savings targets and should be diversified to maximize investment growth potential. High influence plans push employees in the right direction on all these fronts, said Hooker.
High influence plans in a bull market
Between August 2008 and August 2018, the U.S. stock market has been in a recovery that has resulted in a cumulative return of 180 percent for those invested in companies in the S&P 500 Index (which includes dividends and capital gains). Ten years ago, if a company had a qualified default investment alternative (QDIA), a diversified investment vehicle and employed auto features, such as auto enrollment, a worker with a beginning 401(k) balance of $80,000 with a combined deferral and company match rate of 10 percent, would now have an account balance of $237,000, an increase of 195 percent. This assumes a 7 percent investment return on a diversified portfolio.*
Saving and investing regularly, along with a company match and appropriate diversification, allows employees to create the nest egg they will need in retirement. But not all 401(k) plans are created equally, and our goal with this report is to show just how important it is for businesses to design a high influence plan, said Hooker.
* This information is hypothetical and is provided for informational purposes only. It is not intended to represent any specific return, yield, or investment, nor is it indicative of future results. Estimates are based on the assumptions noted, do not guarantee or imply a projection of actual results, and do not include the effect of taxes or fees. Wells Fargo Institutional Retirement and Trust cannot guarantee results under any savings or investment program and cannot guarantee that you will meet your retirement savings goal.
Steady progress from participants
Wells Fargo Institutional Retirement and Trusts five-year Plan Health Index analysis, which examines trends from 2012 to 2017, shows a 42 percent increase in employees meeting all three key savings behaviors “ participating in their 401(k) plans, saving at a rate of 10 percent or more including match, and are diversified. The Plan Health Index is the percentage of eligible employees who meet the goals of all of these savings behaviors.
Among findings in the 2018 Driving Plan Health report:
- Participation in 401(k) plans has increased 18 percent, with millennials continuing to make the biggest gains.
- Savers contributing at a rate of 10 percent or higher have increased 11 percent. Baby boomers (46 percent) are more likely to contribute at that rate, followed by Generation X (36 percent) and Millennials (29 percent).
- The majority of savers (80 percent), invest in a variety of asset classes, with participants investing in a diversified portfolio up 13 percent.
- Among high influence plans, the Plan Health Index has improved by 62 percent over the past five years, and average balances have increased 30 percent.
Beyond plan design
Although plan design is the foundation and the most influential component for engaging participants, businesses also should incorporate effective communications and forward-thinking digital tools to help employees overcome psychological barriers to saving and help them take action. Targeted participant communications and digital tools is likely to encourage positive participant behavior. For example, having a peer comparison tool with a simple click here to change your deferral rate is an easy way to encourage participant action.
From plan design to digital tools and participant communications, the Driving Plan Health report demonstrates how U.S. companies can break down psychological barriers and play a primary role in preparing workers for retirement, Hooker added.
About Wells Fargo Institutional Retirement and Trust
Wells Fargo Institutional Retirement and Trust is a national leader in providing total retirement management, investments, and trust and custody solutions tailored to meet the needs of institutional clients. Wells Fargo Institutional Retirement and Trust ranks 10th based on plan assets in the 2018 PLANSPONSOR Magazine Recordkeeping survey. Rankings are based on total assets under administration. Data was provided by the recordkeepers. This ranking excludes several recordkeepers that chose not to respond. The ranking is not indicative of the recordkeepers past or future performance. Wells Fargo Institutional Retirement and Trust provides retirement plan services to 3.5 million participants representing $389 billion in retirement plan assets (as of 6/30/18).
About Wells Fargo
Wells Fargo & Company (NYSE: WFC) is a diversified, community-based financial services company with $1.9 trillion in assets. Wells Fargos vision is to satisfy our customers financial needs and help them succeed financially. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, investment and mortgage products and services, as well as consumer and commercial finance, through 7,950 locations, 13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 37 countries and territories to support customers who conduct business in the global economy. With approximately 262,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 26 on Fortunes 2018 rankings of Americas largest corporations. News, insights and perspectives from Wells Fargo are also available at Wells Fargo Stories.
Diversification does not guarantee profit or protect against loss in declining markets.
Target date funds are mutual funds that periodically rebalance or modify the asset mix (stocks, bonds, and cash alternatives) of the funds portfolio and change the underlying fund investments with an increased emphasis on income and conservation of capital as they approach the target date. Different funds will have varying degrees of exposure to equities as they approach and pass the target date. As such, the funds objectives and investment strategies may change over time. The target date is the approximate date when investors plan to start withdrawing their money, such as retirement. The principal value of the funds is not guaranteed at any time, including at the target date. More complete information can be found in the prospectus for the fund.
You cannot directly invest in an index.
Wells Fargo Institutional Retirement & Trust is a business unit of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. This information and any information provided by employees and representatives of Wells Fargo Bank, N.A. and its affiliates is intended to constitute investment education under U.S. Department of Labor guidance and does not constitute investment advice under the Employee Retirement Income Security Act of 1974. Neither Wells Fargo nor any of its affiliates, including employees, and representatives, may provide investment advice to any participant or beneficiary regarding the investment of assets in your employer-sponsored retirement plan. Please contact an investment, financial, tax, or legal advisor regarding your specific situation. The information shown is not intended to provide any suggestion that you engage in or refrain from taking a particular course of action.
This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kindincluding a recommendation for any specific investment, strategy, or plan.
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