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Should you be hiking up the default rate on your 401(k) plan?

Jared Bilski
by Jared Bilski
August 25, 2016
  • Benefits
1 minute read
  • SHARE ON

Recognizing that a 3% default rate for 401(k) participation just isn’t cutting it any longer, a growing number of employers are setting their default rates much higher.  

In fact, they’re doubling that 3% figure.

Nearly a third (29%) of defined-contribution plans currently auto-enroll participants at a 6% salary deferral rate, a significant jump from the 17% of plans that did so in 2011.

That’s according to T. Rowe Price’s annual 401(k) benchmarking report.

What’s more, the bulk of plans (51%) now have auto-enrollment, the feature that puts employees into that default rate in the first place. That’s up from the 28% of plans that included this feature back in 2011.

Auto-enrollment is one of the most effective ways employers can bolster 401(k) participation. In fact, plan with an auto-enrollment feature have a participation rate of 88%, while those without this feature only have a participation rate of 48%.

That disparity is even greater among workers in the 20-29 demographic, with 84% participation among plans that offer auto enrollment versus 30% among those that don’t.

Still coming up short

Despite the aggressive plan design tweaks employers are making to their 401(k)s, workers’ contributions are still well short of where they should be: 15% of their take-home rate (including the employer match).

The average participant deferral rate was just 7%, according to the report.

One tactic employers can use to bump up that participation rate: Automatically escalate workers’ contribution rates every year after a raise kicks in.

Of course, if you do up to use this feature, employees must have the option of opting-out whenever they’d like.

 

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