401(k) balances rebound at Principal as Roth adoption climbs

401(k) balances at Principal Financial Group climbed in the second quarter. The average balance rose 9.6% from the prior quarter. On a year-over-year basis, the average was up 12.6%. The figures come from Principal's recordkeeping book, which InvestmentNews describes as among the largest in the country.

Teresa Hassara, Principal's senior vice president for workplace savings, told InvestmentNews that participation and deferral behavior stayed positive even as markets improved. "Improved market performance during the quarter certainly contributed to those higher balances, but participant engagement remained encouraging," she said. The moves are modest. Participant-weighted deferral rates rose 1.8% year over year. Plan-weighted participation rose 1.5%. Auto-enrollment adoption rose 5.1%.

These are small, compounding motions. They run against the employer-side picture. Principal's Financial Well-Being Index surveyed business owners and decision-makers at firms with 2 to 10,000 employees. It found 69% say their workers are delaying retirement. Among those same owners and decision-makers, 71% blame rising living costs and inflation. The people who run plans are seeing strain, while the accounts show staying power.

Roth adoption is moving faster than the rest of the book. Principal's recordkeeping data shows 13.1% of participants now use a Roth 401(k). That is up 16.9% year over year. Availability has climbed as well. By June 30, 89.4% of plans offered the option. That is up 20.6% from June 30, 2021. By generation, 15.9% of Millennials use Roth, the highest rate. Gen X is at 14.5%. Gen Z, at 9.2%, is adding participants from a small base.

The advance is coming from the top of the income scale. Participants earning more than $150,000 a year are driving most of the year-over-year growth, according to Principal. Hassara reads that as tax diversification in action: "the possibility that their tax situation could change over time, or the value of having both pre-tax and after-tax savings available in retirement."

For sponsors, the Roth trend points toward making the option visible and easy. The wide availability and rising usage suggest the feature takes hold when it is offered. The remaining gap between availability and use may be a matter of defaults and communication, not participant resistance.

The employer survey and the recordkeeping book measure different things. The survey captures sentiment; the book captures behavior. Both can be true at once. Workers may delay retirement even while contributions continue, especially if they know they are behind. For a plan sponsor deciding where to put effort, the behavior side points to plan design. Auto-enrollment, auto-escalation and Roth defaults are the tools that move those numbers.

The data also checks the worry that market volatility empties plans. The second quarter's gains helped balances; they did not have to rescue participation. The quiet case for automatic features is that they keep participants contributing through drawdowns and recoveries alike.

Principal's numbers are one large recordkeeper's view of a market cycle. They suggest that participant inertia, steered by plan design, does more good than harm. The next test is whether sponsors use the rebound to revisit default rates and Roth enrollment, or let the market rebound do the work for them.