Baltimore-based T. Rowe Price’s mutual funds are tucked inside many company 401(k) plans, and it notes some encouraging trends: People are tapping their retirement accounts less often and they’re putting more money in them.
T. Rowe Price said the use of 401(k) loans reached a nine-year low of 22.5% in 2018, and continued a six-year decline of nearly 10%.
The percentage of participants who took a hardship withdrawal — subject to taxes and penalties — also fell for the ninth consecutive year, declining from 1.9% in 2010 to 1.3% in 2018.
Despite fewer savers tapping their retirement accounts, loan balances and the average amount of hardship withdrawals increased.
“Overall, we’ve seen an increase in positive participant behavior, however there are still opportunities for continued improvement,” said T. Rowe Price’s Kevin Collins.
“Changing employee behavior requires simple solutions and engaging them in a way that motivates them to act.”
One of those solutions is simply nudging new hires into saving without requiring them to act, specifically through auto-enrollment, something the majority of companies now do.
“In plans with auto enrollment we see participation is over 40 percentage points higher than in plans without auto-enrollment,” T. Rowe Price’s Diana Awed told WTOP.
“That’s the difference between 85% of a company’s employees saving for retirement versus 43%.”
Retirement plans are increasingly taking the guesswork out of properly diversifying investments. Target date funds, or those that adjust risk in holdings based on a participant’s projected year of retirement, reached an all-time high 95% of investment options chosen last year.
“They are popular for a very good reason. They are easy for an individual to understand. Most people can easily understand that their investments should change over time as they get closer to, and then live through retirement,” Awed said.
Participation rate among employees in 401(k) plans did drop nearly 2% last year, and plans that did not have auto-enrollment saw participation drop more than twice the rate of those with auto-enrollment.
Few employees are able to max out their 401(k) contributions — currently $19,000 a year — but the average pretax deferral rate did increase in 2018 to an all-time high average of 8.6%.
And more employers increased company matches last year. Plans offering a 4% employer match surpassed those offering a 3% match for the first time.
T. Rowe Price is babysitting a lot of retirement nest eggs. Its assets under management now top more than $1 trillion.
This content was republished with permission from CNN.