The Pension Protection Act (PPA) of 2006 is one of the most significant legislative developments in the modern age of retirement policy. It enabled automatic-enrollment features, raised contribution limits, and provided a safe harbor for default investment selections whose combined effect has dramatically increased plan-participation rates and put millions of American workers on a path to better retirement outcomes.
A recent survey by Callan Associates found that 67% of plan sponsors felt that the PPA was beneficial to their defined-contribution (DC) plans. Plan sponsors cited several ways in which the act has impacted workers’ retirement goals, including the safe harbor for Qualified Default Investment Alternatives (QDIAs), making permanent provisions of the Economic Growth Tax Relief Reconciliation Act of 2001 (e.g. higher contribution limits and Roth contributions), and providing safe harbors for offering auto-enrollment.
Since the PPA’s enactment in 2006, T. Rowe Price has observed dramatic growth in the implementation of auto-features among the retirement plans that it administers in these major areas:
- Auto-enrollment: Of retirement plans that outsource deferrals to T. Rowe Price, more than half have embraced auto-enrollment. In 2005, only 17.5% of our plans used auto-enrollment. That has grown to 60.7%, as of year-end 2015.
- Default investments (QDIA): Auto-enrollment into target-date vehicles as the default investment have increased from 56% to 96%.
- Auto-increase: Plans using auto-increase have grown from 11.6% to 82.2%.
- Roth contributions: Now offered in 50% of plans, up 7 percentage points from 2014. As a result, participants making Roth contributions have increased for the eighth consecutive year.
While there has been significant growth in these areas, there are still many opportunities ahead to improve retirement outcomes.
The evolving landscape since the PPA has led to shifts in both plan sponsor and participant behavior.
Plan Sponsors Introducing Higher Deferral Rates
While the PPA allowed plan sponsors’ auto-enrollment, and the industry standard seemed to gravitate toward plan sponsors implementing a 3% default deferral rate, plan sponsors are changing the industry standard by increasing auto-enrollment from the typical 3%, resulting in a better chance for positive retirement outcomes.
There has been a 28% increase since 2014 of plan sponsors enrolling at a 6% deferral rate or more (23.6% to 30.2%) in plans where T. Rowe Price is the recordkeeper. While 3% remains the most utilized deferral rate, the shift to 6% indicates that sponsors realize that a 3% deferral is not going to be enough for their participants to save enough for retirement.
This trend can yield positive results. According to the T. Rowe Price Retirement Saving and Spending Study, both Millennials and Gen Xers contribute on average 8% of their pay to a 401(k) plan. For those that were automatically enrolled, about 50% of both generations also agreed (completely or somewhat) they wish they had been enrolled at a higher contribution rate.
Participants Get Stuck at Default Rate
Employers still face challenges with participant inertia on several levels. First, participation rates continue to be strongly tied to the adoption of auto-enrollment. Plans with an auto-enrollment feature have a participation rate of 88%. Plans that don’t offer auto-enrollment only have a participation rate of just 48%.
Only 38% of participants increased their deferral rate in 2015. Assuming most of these participants were enrolled at 3% — the example deferral rate used in U.S. Treasury Department guidance and the PPA safe harbor — plan sponsors should be concerned about retirement readiness for their employees, as well as workforce planning issues.
Auto-increase will automatically raise deferral rates annually towards the suggested 15% savings rate (including employer match). Results show that most of the participants will not opt out of auto-increase features. In fact, plans that offer auto-increase on an opt-out basis have a six times higher adoption rate compared to plans that use opt-in features.
Since plan participants have demonstrated a great degree of inertia in being receptive to default options, there is an opportunity for employers to slowly nudge participants towards a higher savings rate, as high as 15%, over time.
But on a more discouraging note, nearly one-third (31% of participants) are not contributing anything to their retirement plan, putting their retirement in jeopardy.
Financial wellness programs could be a way to address financial well-being for participants so their everyday expenses are not a barrier to saving for retirement. Half of plan participants said they were absolutely certain or very likely to increase their 401(k) contributions if they had less debt, and 31% said they would save more for retirement if they had an emergency fund in place.
While some financial wellness programs focus on short-term money issues like budgeting and debt, there can be some long-term benefits around retirement savings. According to SmartDollar, 39% of participants in their financial wellness programs are saving 15% of their salary for retirement after 2 years.
Those statistics show that participants who view their finances on a holistic level are more equipped to make decisions that can lead to better outcomes. Our industry has an opportunity to build on this and encourage behaviors that can eventually improve the overall retirement readiness of plan participants.
 Callan, DC Spot Survey, June 2016.
 T. Rowe Price Retirement Plan Services, based on active 401(k) plans that outsource deferrals to T. Rowe Price only, 12/31/2005.
 T. Rowe Price Reference Point, 2016.
 T. Rowe Price Retirement Saving and Spending Study, 2015
 T. Rowe Price Reference Point 2016
 T. Rowe Price Retirement Saving and Spending Study, 2015
 Smart Dollar, 2015