Institutional Retirement and Trust
Driving Plan Health — 2016
Participant behavior
Targeted research
Plan data trends
A message from Joe Ready Wells Fargo Institutional Retirement and Trust’s mission is to “Help America’s diverse workforce prepare for a better retirement.” These are not merely words, but what we focus on each and every day. As the retirement plan industry continues to evolve, and defined contribution plans now serve as the primary way Americans save for retirement, it is crucial that plans are designed to help participants at every stage of their career — from first day on the job through retirement. As a leading retirement plan provider serving more than 5,000 plans, we constantly seek to understand the challenges both plan sponsors and participants face in preparing for retirement. We study the data from the plans we administer on an ongoing basis to observe what works for our plan sponsors and how we can continue to help improve the outcomes for participants.
Joe Ready
The Driving Plan Health report reflects data from 2011–2016. It EVP, Director of Institutional Retirement and Trust highlights key trends in the areas of participation, contribution rate, and diversification, and how Wells Fargo ties it all together with our Plan Health IndexSM score. The report also looks at plan design features that have the biggest impact on desired outcomes and delves into how nuances in feature design and implementation can greatly impact effectiveness. A few key themes from the report: • Demographics of the plan matter. Age, tenure, and income all impact plan success and will influence the key measurements within the plan. • Plan design makes a difference. The features adopted within the plan can, over time, help offset challenging demographic factors. • Correct implementation of plan design is essential. It matters how plan sponsors adopt plan features in order to set the plan up for success. The Driving Plan Health report also includes an appendix of additional charts and graphs providing information by plan size, industry, and participant gender, along with a more in-depth look at the impact of auto features. We’re confident that this report can spark new conversations around plan design, and we’re here to help. Contact your Institutional Retirement and Trust representative with any questions regarding the report. Best regards,
Joe Ready
Table of contents Executive summary 1 Introduction 2 Participation 3 Contribution rate 7 Diversification 11 Plan Health Index
14
Conclusion 15 Appendix 16
Executive summary Wells Fargo Institutional Retirement and Trust’s mission is to “Help America’s diverse workforce prepare for a better retirement.” To deliver on this mission, we must first understand current participant behaviors and what plan design elements are driving these behaviors. With four million eligible employees across diverse industries and geographies, Wells Fargo can get a fairly clear picture of what works to better help plan sponsors design their retirement plan for success.
These drivers are some of the key items to focus on when a plan analysis reveals areas in need of improvement. Each of these drivers is described in this report, as well as the impact they can have on a plan. Other findings we uncovered during our analysis include:
Based on research conducted by our dedicated Customer Insights and Analytics team on the plans we administer, we analyzed the three key behaviors that will help participants reach their financial goals for retirement — participation, contribution rate, and diversification. It may be difficult to reach their retirement goals if employees are not participating in the employer-sponsored retirement plan. Once in the plan, it may be difficult for participants to grow their accounts if their contribution rate is low and their account is not diversified appropriately to meet their retirement goals.
• Plan defaults can make a huge difference in whether a participant meets his/her goal for a better retirement. These defaults include automatic enrollment, automatic increase increments and the upper limit, and the plan’s default investment (i.e., QDIA).
Beyond the simple yes/no answers to whether participants are meeting goals related to these behaviors, we studied how the plan sponsor can have an impact on these behaviors. Participant decision making is important, but the plan sponsor plays a critical role as well. Plan design elements such as automatic enrollment and contribution increase programs, company match structure, and the chosen default investment can all trigger better participant outcomes when they are implemented in a strategic way. We took an in-depth look at our own book of business to provide the latest in participant trends for participation, contribution rate, and diversification coupled with the best plan design practices that are driving positive participant behavior. While many factors — both in and out of the plan sponsor’s control — influence participant choices, below are the top drivers for each participant behavior.
Top drivers for key participant behaviors Participation
Contribution rate
Diversification
Automatic Enrollment
Total Match
Plan has QDIA
Match Cap
Total Match
Automatic Increase
Communication Campaigns
1 | Insights from Wells Fargo’s defined contribution plan data
• Participation has increased by 19% during the last five years, with increases noted across all demographic segments. Average contribution rate and participant diversification have also improved during this time span.
• Employee communication campaigns can have an impact on all areas of participant behavior but have proven to be especially beneficial for targeting audiences with a lack of investment diversification. • Younger employees are reaping some of the benefits of what the retirement industry has learned over the past several decades. Given today’s plan design trends, employees just starting out are likely to be automatically enrolled in the plan and defaulted into a diversified investment option. Starting at a young age can give an employee a better chance of saving what is needed and seeing the growth necessary to prepare for a better retirement. • Within all three behaviors, employees with longer tenures experience better results. Plan sponsors must consider what role turnover plays in determining plan health. • In general, the youngest employees are positioned for better results due to enhanced plan design and the oldest employees benefit from exposure to the plan, longer tenures, and greater sense of urgency as retirement becomes imminent. Plan sponsors need to be aware of the pockets in between that may have been overlooked and need additional attention to get them on track. • A thorough plan analysis can reveal slight changes that can have a big impact. In many cases, these changes can be made with little impact on the budget for a plan.
While every retirement plan is unique, we can use the information gleaned from our entire client base to understand how a plan change can affect results. When plan sponsors pinpoint the areas that need to be addressed and take action based on potential results, the plan’s health is likely to improve and participants may be more likely to take important steps toward reaching the 80% income replacement goal.
Introduction Wells Fargo Institutional Retirement and Trust administers defined contribution plans representing four million eligible employees. By analyzing our extensive book of business, we can determine the impact that individual plan design features have on participant savings behaviors and overall plan health. This information then helps plan sponsors better understand the implications of their plan design choices and what changes may help them achieve goals for the plan and its participants. Wells Fargo has a diverse book of business with retail, administrative support, and accommodation/food services industries representing the largest percentage of eligible employees. The impact of a particular plan feature will vary based on participant demographics, such as salary and age, as well as plan sponsor attributes, such as organization size and industry. Wells Fargo takes these factors into consideration as we focus on what the plan sponsor can control through plan design. For this analysis, Wells Fargo looks at three key behaviors of participants — participation, contribution rate, and diversification. For each of these, we have set a goal that may help participants stay on track for a better retirement. Striving to meet all three of these behavior standards early in their career can help participants optimize their retirement outcomes.
Participant goal: 80% income replacement Why 80%? We know some people may need more than 80%, others less. But research shows that for a majority of people 80% is a good place to start. This goal is prominent in all participant interactions and we tell participants how they are progressing toward the goal and offer a next best step for each participant. As we explore ways to improve plan design the ultimate purpose is to help participants reach the 80% income replacement goal.
We will explore each behavior separately and also illustrate how Wells Fargo looks at the three behaviors together to provide plan sponsors with an overall Plan Health Index score. With this information, Wells Fargo can work with plan sponsors to determine where changes in plan design may be necessary. In addition, statistical analysis has demonstrated that participants who consistently meet all three of these behavior standards are much more likely to achieve an income replacement of 80% or greater in retirement than those who do not. Influencing these behaviors is the best means plan sponsors have for helping their employees meet their retirement savings goals. The ideas outlined in this report are focused on helping produce the best possible outcomes for plan participants. Some plan changes may require additional funding and resources from the plan sponsor, so all should be considered in light of the plan’s goals and budget.
Participant behavior
Goal
Participation
An eligible employee is participating
Contribution rate
The participant is contributing at least 10% of pay, including employee and employer contributions
Diversification
The participant is invested in: • a diversified investment solution (such as a target date fund or managed account product) • a comprehensive advice program — OR — If a participant instead chooses to self-direct investments, the participant is invested in at least two different classes of equity funds and one fixed income fund, and has less than 20% invested in employer stock Insights from Wells Fargo’s defined contribution plan data | 2
Participation Getting employees to participate in the plan is the first critical step for plan success. In studying the Wells Fargo book of business, we find participation has increased by 19% in the last five years. Increases can be seen across all demographic segments.
Participation goal All eligible employees participating in the plan.
Participation by Income (% of employees participating in the plan) 100%
‘11
80% 70.6% 61.1%
61.0%
60% 47.9%
81.4%
79.8%
76.3%
73.6%
71.1%
67.1%
‘16
47.4%
40% 30.6% 20% 0% < 20k
20k–39k
80k–99k
60k–79k
40k–59k
>=100k
Participation by Tenure (% of employees participating in the plan) 100%
‘11
80% 60% 40%
59.3%
53.3% 46.2%
63.9%
62.2% 53.8%
50.9%
60.9%
66.9%
65.3%
70.5%
66.6%
‘16
72.3%
35.5%
20% 0% < 1 year
1–2 years
5–9 years
3–4 years
10–14 years
15–19 years
>= 20 years
Participation by Generation (% of employees participating in the plan) 100%
‘11
80% 59.2%
60% 40%
44.8%
63.5% 51.8%
65.9% 57.2%
20% 0% Millennials
3 | Insights from Wells Fargo’s defined contribution plan data
Generation X
Boomers
‘16
Participation Demographic trends When analyzing plan health, it’s important to consider the factors that have an impact on participant decision making. Demographic variables play an important role: how much an employee is earning, how long the employee has been employed by the sponsor, and the employee’s age (reported here by generation). This report illustrates the demographic analysis for each participant behavior. When examining participation, our demographic analysis shows:
Income matters Not surprisingly, the higher the income, the more likely the employee is participating. However, there is positive movement at all income levels. For example, participation went from 30.6% in 2011 to 47.9% in 2016 (56.5% increase) for participants earning less than $20,000 per year, while participation went from 73.6% in 2011 to 81.4% in 2016 (10.6% increase) for those earning $100,000 or more.
Long tenure tops turnover Participants with longer tenures have better participation rates. The alignment between tenure and participation happens for a variety of reasons — from workers realizing saving for retirement is important as they age to ongoing exposure to the plan and its benefits.
With age comes wisdom When we looked at participation by generation, Boomers have the highest participation rate, currently at 65.9%. However, Millennials and Gen Xers have gained ground in their participation rates over the last five years as well. Most notable is the 32.1% growth in Millennial participation. We attribute this to the impact of automatic enrollment that sweeps in new employees at the start of their careers, which we’ll discuss on the following page.
A closer look Industry categories with the highest average tenure are also the ones with the highest participation rates. For example, the Utilities industry has the highest average tenure for any industry at 13.8 years and it also has the highest participation rate at 90.7%. The top industries in terms of participation have average tenures of nine years or more; for example, Finance and Insurance with 75.5% participation.
Insights from Wells Fargo’s defined contribution plan data | 4
Participation Key drivers to help increase participation Participation Top 5 Drivers* Automatic Enrollment
32.1
Total Match
20.8
Match Cap
18.4
Automatic Increase Managed Product Offered
*These key drivers are based on correlations measured by a Kolmogorov-Smirnov test (K-S test). The larger the number, the proportionately stronger the relationship.
16.7 13.6
Key driver: Automatic Enrollment Overall participation rates for plans with automatic enrollment are above 80% while plans without it have less than 50% participation. Given these results, using automatic enrollment may be a strategy to strongly consider; however, it does matter how this feature is structured for best results. 1. Is automatic enrollment being used for all employees (including those who previously declined to participate in the plan) or for newly eligible employees only? If focused on newly eligible, the plan sponsor may be missing a great opportunity to re-engage employees who declined to participate in the past. While some may decline participation, inertia can work to the plan sponsor’s advantage as most employees will not make the effort to opt out. The average opt-out rate for automatic enrollment is just 10%. 2. Are employees being automatically enrolled at a low contribution rate? Many plans automatically enroll participants at a 3% default deferral rate or less. Our data shows that opt out rates do not vary substantially from lower to higher (6%+) default deferral rates. Plans with lower default deferral rates have overall lower average deferral rates, which presents its own set of challenges as we’ll show in the Contribution rate section. 3. If high first-year turnover is a barrier to adding automatic enrollment, plan sponsors can offer voluntary enrollment based on the plan’s eligibility requirements while delaying the automatic enrollment feature until an employee reaches a tenure milestone, such as one or two years of service.
Best practice Consider enrolling all employees (both new and nonparticipating) at a 6% default deferral rate. Plans that have implemented automatic enrollment at a 6% default deferral rate average 87% participation, plans with automatic enrollment at a 3% default deferral rate average 83% participation, whereas those without automatic enrollment have a 48% participation rate.
Opt-Out Rates by Default Deferral Rate
Deferral Rate 3% 6%
15%
11.4% 10%
5%
0%
5 | Insights from Wells Fargo’s defined contribution plan data
10.3%
Participation Key drivers to help increase participation Key driver: Total Match Employer contributions are an important element of successful plan design. Attention paid to the design of the match has an impact on the health of the plan, even given budget considerations. 1. Do automatically enrolled employees receive the whole employer match (if available)? If not, is there an automatic increase program to help participants work toward receiving the complete employer match? (More details on automatic increase programs are included in the Contribution rate section.) 2. A higher total match is a driver of behavior even if automatic enrollment is not used. As the chart shows, the higher the percentage of the match, the higher the plan’s participation rate.
Average Participation by Total Match in plans without Automatic Enrollment 100% 80% 64.6%
60% 48.7%
56.3%
40% 20% 0% Match: >=0% 3% 6% =100k
Contribution Rate by Tenure (% of participants contributing 10% or more, including employer match) ‘11
‘16
60% 40% 20%
26.2% 26.1%
28.2% 30.7%
= 20 years
Contribution Rate by Generation (% of participants contributing 10% or more, including employer match) ‘11 60% 40% 20%
28.6%
23.1%
29.7%
35.2%
44.5%
40.2%
0% Millennials
7 | Insights from Wells Fargo’s defined contribution plan data
Generation X
Boomers
‘16
Contribution rate Demographic trends When examining demographic trends as they relate to contribution rates, our analysis shows:
Income segments produce some surprises While income is a factor in reaching the 10% contribution rate goal - it is worth noting that workers earning less than $20,000 had a higher percentage of participants meeting the 10% goal than workers in the $20,000 - $39,000 income range. Workers earning $100,000 or more who contribute 10% or more represent the “most improved” group with a 15.3% increase since 2011. The next largest increase came from workers in the $40,000–$59,000 income range where workers contributing 10% or more increased 8.3%.
Long-time tenure results in higher contribution rates Contribution rates go up with tenure. This may be in part due to automatic increase programs, but may also include intangible factors such as more exposure to the plan, and saving becoming more important as the participant ages.
By generation, Boomers have the highest percent of participants contributing 10% or more — currently 44.5%. However, the percentage of Millennials and Gen Xers reaching the 10% goal has increased more over the last five years, with the former increasing by 23.8% and the latter by 18.5%.
A closer look Not surprisingly, deferral rates and total contribution rates (both employee and employer contributions) tend to increase with age.
15%
Deferral rate
Total contribution rate 11.2%
10% 5%
Boomers lead the way
8.3% 5.8%
9.2% 6.8%
8.7%
0% Millennials
Generation X
Boomers
Catch-up contributions
Roth contributions
Only 7.7% of participants age 50 and older are taking advantage of catch-up contributions which allow them to save an additional $6,000 (indexed for inflation) each year to their 401(k) plan. Management Companies was the industry that led the way with 18% of eligible participants making catch-up contributions, followed closely by Professional Services at 13%.
Roth (after-tax) 401(k) deferrals continue to gain traction with 12% use among participants (up from 8% in 2011). Of participants using the Roth option, Millennials lead the way at 16% adoption. Management Companies has the highest industry usage of Roth deferrals, with 22% of participants making Roth contributions. Finance and Insurance companies are a distant second at 14%. Insights from Wells Fargo’s defined contribution plan data | 8
Contribution rate Key drivers to help increase contribution rate Contribution Rate Top 5 Drivers* Total Match
33.8
Match Cap
23.6
Automatic Increase
17.6
Plan has QDIA Communication Campaigns
16.8 16.2
*These key drivers are based on correlations measured by a Kolmogorov-Smirnov test (K-S test). The larger the number, the proportionately stronger the relationship.
Key driver: Match Cap We explored total match as a key driver in the Participation section so for contribution rate we will focus on match cap and automatic increase. Match cap indicates the structure of the match, i.e. highest deferral rate matched. Nearly 90% of our clients offer some type of employer match (either discretionary or fixed) to participants in their retirement plans. Plans that offer a fixed match average about 46% of their participants reaching the 10% contribution goal; plans that don’t offer a fixed match have only 27% of participants meeting the contribution goal. For plans that don’t use automatic programs, the match and its structure may be one of the best ways to drive participant behavior. For example, if a plan sponsor offers a dollar-for-dollar match on the first 6% of pay and the median contribution rate is 6%, it appears that employees are “saving to the match cap.” Would they likewise increase their deferrals if the match structure changed to 75¢ of the dollar up to 8%? The change would likely be better received if an extra monetary incentive was attached, such as dollar-fordollar on the first 6% of pay and 50¢ on the dollar for the next 2% of pay. This could help push a participant’s saving rate to 8% but may also increase the employer’s match cost. While incorporating a match or changing its structure is likely to have positive results on the overall contribution rate, the associated cost that would accompany any improvement would need to be carefully evaluated by the retirement plan sponsor.
9 | Insights from Wells Fargo’s defined contribution plan data
Best practice Structure your automatic enrollment default rate and match cap to put participants on track to reach the 10% contribution goal as quickly as possible.
Contribution rate Key drivers to help increase contribution rate Key driver: Automatic Increase With approximately 66% of our clients using an automatic increase program (also called auto escalation), it can be a key driver of positive participant behavior, but design of the feature is key to the level of success.
Opt-in versus opt-out
Automatic increase works best with automatic enrollment
While 66% of plans using an automatic increase program is impressive, less than 30% of those plans implemented it on an optout basis. Opt-out simply means the participant must take action or “opt-out” of the automatic increase, otherwise the increase will occur annually up to the maximum limit set by the plan sponsor. Using an opt-out strategy takes advantage of participant inertia. Plans offering opt-out automatic increases retain 79% of participants in the program (meaning only 21% of participants opted out). Plans that offer automatic increases using an “opt-in” strategy (the participant must select to participate in the program) only have 21% of participants sign up. For best results, plan sponsors should strongly consider adding automatic increase requiring participants to “opt-out”.
The success of an automatic increase program depends on how it is designed and implemented along with other plan features. Best results are seen when a plan has both an automatic increase program and automatic enrollment, specifically automatic enrollment at a high default deferral rate (6%+). As we discussed in the Participation section, opt out rates do not vary substantially from automatic enrollment at a lower (3% or less) to a higher (6%+) default deferral rate, so automatic enrollment at a higher percentage is a best practice. Here is an example of how automatic enrollment and automatic increase can work together:
Setting limits As part of any automatic increase program, plan sponsors need to establish the upper limit for when automatic increases will stop for a participant. Approximately 39% of our clients have set the automatic increase limit at 10% which allows a participant to reach the 10% contribution rate goal even without an employer contribution. A 10% or higher automatic increase limit is a suggested best practice.
+1%
+1%
+1%
+1%
+1%
+1%
3%
10%
1 year
8 years
It will take a participant in a plan that automatically enrolls participants at 3% with a 1% annual automatic increase eight years to reach the 10% goal (assuming no employer contribution).
+2%
6%
10%
1 year
3 years
However, a plan that enrolls participants at 6% and has a 2% annual automatic increase will have participants at 10% in three years.
Using a higher automatic enrollment rate paired with a higher automatic increase annual rate is a best practice for better participant retirement readiness. In general, a best practice is for plan sponsors to encourage participants to get to the 10% goal as fast as possible. The higher initial contribution rate also means the money has more time to be invested and potentially grow, an additional advantage for the participant.
Insights from Wells Fargo’s defined contribution plan data | 10
Diversification Participating in the plan and making adequate contributions are critical steps in preparing financially for retirement, but lead to the next important question — how are participants investing their contributions? Lack of diversification — whether its having 100% in a stable value fund or an extremely aggressive emerging markets fund — could have an adverse impact on participant outcomes. Wells Fargo focuses on a diversification goal for participant assets (described in the box to the right) that addresses investors who seek a simplified solution as well as those who prefer to make investment choices for themselves.
Diversification goal
Diversification by Income (% of participants invested in a diversified portfolio) 100%
‘11
60%
82.7%
81.8%
80% 64.8%
64.2%
80.3% 67.6%
79.9%
79.8%
72.2%
71.3%
70.2%
‘16 78.3%
40% 20% 0% < 20k
20k–39k
40k–59k
60k–79k
80k–99k
>=100k
Diversification by Tenure (% of participants invested in a diversified portfolio) 100%
‘11
80% 76.2%
86.6%
85.2% 71.7%
60%
83.6% 65.5%
79.6% 61.2%
75.0% 58.2%
‘16
72.6%
72.0% 61.8%
59.2%
40% 20% 0% = 20 years
Diversification by Generation (% of participants invested in a diversified portfolio) 100%
‘11 83.6%
80% 67.2% 60%
79.6% 63.6%
‘16 76.7%
62.9%
40% 20% 0% Millennials
Generation X
11 | Insights from Wells Fargo’s defined contribution plan data
Boomers
As a general rule, Wells Fargo considers a participant to be “diversified” if the participant is invested in a diversified investment solution such as a target date fund, managed account product, or a comprehensive advice program. If a participant chooses to self-manage their investments, Wells Fargo considers the participant to be “diversified” if the participant invests in at least two different classes of equity funds and one fixed income fund, and has less than 20% invested in employer stock. While Wells Fargo considers participants who meet these criteria to be “diversified” this is not intended to indicate that participants are appropriately diversified based on their individual situations.
Diversification Demographic trends Our clients have experienced significant improvement related to diversification over the last five years with an impressive 26.2% increase. A closer look at the demographic trends reveals:
The newest participants have a diversification advantage
Higher income does not mean better diversification Approximately 82% of participants on the lower end of the income scale meet the diversification goal while 78% on the higher end meet the diversification goal.
Younger and less tenured employees are more likely to satisfy the diversification goal, most likely due to being defaulted into their plan’s Qualified Default Investment Alternative or QDIA (typically, a target date fund or managed account/advice program).
Key drivers to help improve diversification Diversification Top 5 Drivers* Plan has QDIA
27.1
Communication Campaigns
26.1
Total Match
25.4
Match Cap Automatic Increase
22 17.9
*These key drivers are based on correlations measured by a Kolmogorov-Smirnov test (K-S test). The larger the number, the proportionately stronger the relationship.
Key driver: Plan has QDIA 84% of plans have a QDIA and, of those, 82% use either a target date fund series or managed account program as their QDIA. This gives the plan sponsor a level of fiduciary protection while providing participants with a diversified investment option. The Pension Protection Act of 2006 encouraged plans to implement automatic enrollment and required a QDIA to ensure some level of plan sponsor protection. Since the implementation of the Pension Protection Act, we’ve seen an uptick in plans offering both. The same inertia that keeps employees from opting out of automatic enrollment also works for their default into the QDIA. On average, 72% of participants in our book of business are invested in their plan’s QDIA. Moreover, our data shows that participants not invested in QDIAs tend to have much lower chances of meeting the diversification goal. Only 37% of participants not invested in QDIAs reach the diversification goal. Assets outside the retirement plan are not considered in this analysis. This is a snapshot of behavior within the plan only.
Best practice A retirement plan may consider offering a QDIA as a default option for participant contributions and may want to consider a communication campaign to increase awareness of the QDIA as a tool to help participants reach their diversification goal. Only 37% of participants meet the diversification goal within the plan when not invested in the QDIA.
Insights from Wells Fargo’s defined contribution plan data | 12
Diversification Key drivers to help improve diversification Key driver: Communication Campaigns
Technology with a purpose:
While automatic enrollment and a QDIA seem to help most younger and less tenured employees reach the diversification goal, there can be segments of the existing employee population that entered the plan before such best practices were in place. Targeting specific participant segments with diversification messaging can be a cost-effective way to drive positive participant behavior and is a recommended best practice.
Right message. Right way. Right time.
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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. © 2015 Wells Fargo Bank, N.A. All rights reserved. G24937 7-15 PC
13 | Insights from Wells Fargo’s defined contribution plan data
Wells Fargo Institutional Retirement and Trust 1525 West WT Harris Boulevard Charlotte, NC 28262-8522
The Wells Fargo Plan Health Index: Bringing it all together The Wells Fargo Plan Health Index score measures the percentage of employees in a plan who meet all three participant behaviors — participation, contribution rate, and diversification.
37% increase
For our overall book of business, all the participant behavior metrics have seen a steady increase in the last five years, albeit some growing faster than others. The increase in each of the individual metrics has helped overall plan health. The Plan Health Index score for our total book of business is 37% higher in 2016 than it was five years ago. A plan sponsor can use the Plan Health Index score and the underlying index data to look deeper into their plan performance and ask key questions, such as: • Of the three behaviors, is there one behavior lagging behind the others? Understanding this could help retirement plan providers and sponsors determine where to focus future efforts — plan design and communication/education — to shore up overall plan health. • Is there a segment of employees who need extra help in one area? Do Millennials need additional encouragement to contribute at a higher rate? Are employees with long tenures not meeting the diversification goal? • Is there a significant number of middle-age employees who never joined the plan? Do you want to consider a one-time automatic enrollment sweep for all employees?
over the last five years
Plan health supports participant retirement readiness Statistical analysis has demonstrated that participants who consistently meet the three key behavior standards — participation, 10% contribution rate, and diversification — are much more likely to achieve an income replacement of 80% or higher in retirement than those who do not. Influencing these behaviors is the best means plan sponsors have for helping employees prepare for retirement.
• Can automatic enrollment be implemented for employees after they meet key employment tenure milestones? • Can the match be structured to drive participants toward the 10% goal?
Insights from Wells Fargo’s defined contribution plan data | 14
Conclusion While our plan data over the last five years shows that more participants are making better decisions for the future, it also shows there is much room for improvement. Progress has been made, but is it enough to provide for a better retirement for employees across the board? Even more important than understanding what has happened in the past is taking the information in this report and applying the lessons learned to improve results for the future. Each retirement plan, on its own, will have areas of opportunities as well as challenges to address. Plan data shows how changes to plan design — including automatic features, investment defaults, and matching contributions — can impact the plan and participant results. Targeted employee communication campaigns play an important role too. In all of these areas, what steps can be taken, what trends can be tapped, to move the needle in a better direction for employees in specific demographic segments?
A closer look Take a look at your plan and potential changes that could have an impact on employee retirement readiness.
The information in this Driving Plan Health report can help decision makers — plan sponsors, advisors, and consultants — dig deeper into areas that can lead to improvements and a better retirement for employees.
Helping America’s diverse workforce prepare for a better retirement.
15 | Insights from Wells Fargo’s defined contribution plan data
Appendix Evolution of Plan Health Index metrics During the past five years, we have experienced steady increases in all three key participant behaviors — participation, contribution rate, and diversification. These increases can be attributed to automatic features being added to plan design, increased communication both direct to employees and in the general population, and growing concerns over retirement security.
Participation
Contribution Rate
(% of employees participating in the plan) 100%
(% of participants contributing 10% or more, including employer match)
‘11
‘16
80% 62.0%
60%
52.1%
100%
‘11
Diversification
(% of participants invested in a diversified portfolio) 100%
‘16
80%
80%
60%
60%
40%
40%
20%
20%
20%
0%
0%
0%
‘16
79.5% 63.0%
40%
36.9%
34.4%
‘11
Results by plan size The following charts look at each Plan Health Index metric — participation, contribution rate, and diversification — by plan size (measured by assets).
Participation by Plan Size
(% of employees participating in the plan) 100%
‘11
‘16
80% 68.0%
60% 40%
54.4%
71.9% 62.9%
Contribution Rate by Plan Size
Diversification by Plan Size
(% of participants contributing 10% or more, including employer match) 100%
‘11
(% of participants invested in a diversified portfolio) ‘16
100%
80%
80%
60%
60% 46.7%
40% 31.2% 33.4%
37.8% 38.2%
38.9%
45.3% 42.8%
20%
20%
0%
0%
0%
$100MM – $250MM
>$250MM
$250MM – $250MM
81.9%
80.0%
62.1%
66.5%
68.1%
$10MM – $100MM
$100MM >$250MM – $250MM
62.7%
40%
20%
$10MM – $100MM
‘16
76.6%
68.7% 67.9%
57.7%
46.5%
=100k
Income Replacement by Tenure 100%
‘16
80% 68%
69%
= 20 years
Income Replacement by Generation 100% 80%
‘16 78% 62%
60%
51% 40% 20% 0% Millennials
Generation X
Boomers
*Income replacement considers plan assets only.
Insights from Wells Fargo’s defined contribution plan data | 20
Appendix Managed investments These charts show the percentage of participants using a managed investment solution by income, tenure, and generation.
Managed Investments by Income 100% 80%
‘16 85%
85%
80%
78%
75%
70%
60% 40% 20% 0% < 20k
20k–39k
40k–59k
60k–79k
80k–99k
>=100k
Managed Investments by Tenure 100%
‘16
91%
87%
80%
85%
80% 70%
60%
65%
62%
15–19 years
>= 20 years
40% 20% 0% =100k
Loans by Tenure 100%
‘16
80% 60% 40% 20% 0%
17%
24%
29%
32%
29%
10–14 years
15–19 years
>= 20 years
8%
2% =100k
Roth Deferrals by Tenure 100%
‘16
80% 60% 40% 20% 11%
14%
15%
13%
10%
9%
8%
= 20 years
0%
Roth Deferrals by Generation 100%
‘16
80% 60% 40% 20%
16%
11%
8%
Generation X
Boomers
0% Millennials
23 | Insights from Wells Fargo’s defined contribution plan data
Appendix Impact of automatic enrollment As this chart shows, the impact of implementing automatic enrollment for a plan can be quite dramatic. Participants meeting the participation and diversification goals increase substantially. The percentage of participants meeting the contribution rate goal is actually less. This could be attributed to plans automatically enrolling participants at low default contribution rates.
Automatic Enrollment Impact on Plan Health Metrics 100%
Without Auto Enroll
With Auto Enroll 84.6%
83.8%
80%
75.9%
60% 48.2%
40.8%
40%
35.4%
20% 0% Participation
Contribution Rate
Diversification
Impact of automatic increase Similar to the automatic enrollment chart, here we see the impact of adding an automatic increase program to a plan. Again, participation is greatly enhanced (most likely due to the fact that a plan with an automatic increase program also has automatic enrollment) and diversification is also increased. However, the percentage of participants meeting the contribution rate goal is lower with the increase program in place. This could be attributed to increase programs being relatively new for most plans. Depending on its structure, a contribution increase program can require a longer time horizon to see results — especially if automatic enrollment starts at a low percentage and increases are only 1% a year.
Automatic Increase Impact on Plan Health Metrics 100%
Without Auto Increase 86.5%
80% 60%
With Auto Increase 86.1% 78.1%
58.1%
40%
38.8%
37.4%
20% 0% Participation
Contribution Rate
Diversification Insights from Wells Fargo’s defined contribution plan data | 24
Data as of March 31, 2016. Recordkeeping, trustee, and/or custody services are provided by Wells Fargo Institutional Retirement and Trust, a business unit of Wells Fargo Bank, N.A. This information is for educational purposes only and does not constitute investment, financial, tax, or legal advice. Please contact your investment, financial, tax, or legal advisor regarding your specific needs and situation. This information is general in nature and is not intended to be reflective of any specific plan. © 2016 Wells Fargo Bank, N.A. All rights reserved.
