New study shows that ‘high influence plans’ can help employees
overcome the barriers to saving enough to retire
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.”
“Influence Factor”
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 person’s
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 Trust’s 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 Fargo’s 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 Fortune’s 2018
rankings of America’s 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 fund’s 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 fund’s 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 kind—including a recommendation for any
specific investment, strategy, or plan.
CAR-1018-01104
Investments in Retirement Plans: NOT
FDIC-Insured/NO Bank Guarantee/MAY Lose Value
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version on businesswire.com: https://www.businesswire.com/news/home/20181017005515/en/
Allison Chin-Leong,
212-214-6674allison.chin-leong@wellsfargo.comorAmy Hyland Jones,
704-374-2553amy.hylandjones@wellsfargo.com
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