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Businesses Play Pivotal Role in Preparing Workers for Retirement, Study Shows

    

CHARLOTTE, NC, October 17, 2018 -- A new report from Wells Fargo Institutional Retirement and Trust details the specific features of a well-designed 401k 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 401k 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 401k 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 401k 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 401k 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 401k 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 401k 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 401k 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 401k 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.

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 401k 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 401k 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.

* 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.

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