While 401(k) participation rates drop in 2022, 403(b) rates hit record-high

The Plan Sponsor Council of America looked at 250 nonprofit organizations that sponsor 403(b) plans for their employees, as automatic enrollment took hold in the nonprofit space.

While participation rates for 401(k) plans saw a decline in 2022, participation subsequently increased in 403(b) plans during the same time period. This growth proved to be a record high for 403(b) plans and participants.

The findings come from PSCA’s 2023 403(b) Survey, sponsored by HUB International and Principal Financial Group. The study looked at 250 nonprofit organizations that sponsor 403(b) plans for their employees, and compared them to their private sector counterparts.

Nonprofit employees, on average, were more consistent with their retirement investment than most private sector employees. Four in five (80%) eligible employees contributed to their plans in 2022. Nonprofit organizations also pulled their weight, contributing an average of 30% more to employee accounts – more than $6,000 per participant.

“While contribution rates slipped among the private sector in 2022, nonprofit employees and employers maintained or increased plan contributions,” said Hattie Greenan, director of research and communications at PSCA.

“Additionally, organizations added plan design features aimed at increasing participation and savings rates, including automatic enrollment.” Private sector businesses have been automatically enrolling employees into 401(k) retirement plans for a while now. After years of progression, the same may finally be taking hold in 403(b) plans. Nearly one-third (33%) of nonprofits automatically enroll new hires into the plan, up from 25% the year before.

Not only are organizations increasing their use of automatic enrollment, they’re also implementing it with higher default rates and automatically raising those default rates over time. Automatic enrollment participation jumped by nearly 20% in 2022 and is now used by more than 30% of plans. More than one third (36%) of plans with automatic enrollment use a default deferral rate greater than three percent. Additionally, two-thirds (66%) of plans now automatically escalate the default deferral percentage over time.

“It was never very clear why the use of automatic enrollment in 403(b) plans lagged significantly behind their 401(k) counterparts,” said Greenan.

Related: Record-high 401(k) plan participation, thanks to auto-enrollment

“Seeing it begin to take hold in the nonprofit space, especially as it is largely seen as a best practice in retirement plan administration, bodes well for the increased retirement security for those who dedicate their time to mission-focused organizations, often for less pay than in the corporate world.”

PSCA’s survey also revealed increases in immediate eligibility to receive contributions, an increase in Roth availability, and an increase in the use of Investment Policy Statements (IPS).

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