PRACTICE MANAGEMENT
Given the far-reaching health, economic and workplace
changes that have occurred so far during 2020, defined contribution plan
participants have been remarkably disciplined. Recent studies have shown that
despite these challenges—and amid market volatility—participants have been
steadfast.
According to the Investment Company Institute’s
"Defined Contribution Plan Participants’ Activities, First Half 2020"
report, Americans continued to save for retirement through their DC plans and
there has been only a slight increase in withdrawal activity, despite economic
stresses brought about by the COVID-19 pandemic.
The ICI’s study tracks contributions, withdrawals and other
activity in 401(k) and other DC retirement plans, based on DC plan recordkeeper
data covering more than 30 million participant accounts in employer-based DC
plans at the end of June 2020. This edition also tracks Coronavirus-related
distributions (CRDs) to provide insight into financial activity related to the
pandemic.
Vanguard in "How America Saves Small Business: An
update on 2020," an accompaniment to the firm’s annual How America Saves
Small Business Edition, as well as its annual "How America Saves"
study, found that the tendency toward resiliency also showed among small business
employees, who it found maintained a long-term perspective in saving for
retirement.
Preliminary estimates by the ICI of the latest recordkeeper
data indicate that only 2% of DC plan participants stopped contributing to
their plans in the first half of the year, which is a typical rate across a
majority of the 12 years it has tracked this data. That compares with 1.3% in
the first half of 2019 and 4.6% in the first half of 2009, during the last
major economic downturn.
Markets and Investment
The ICI found that while the levels of reallocation activity
are slightly higher compared to a year earlier, most DC plan participants
stayed the course in their asset allocations despite stock market volatility at
the end of the first quarter.
The ICI reports that in the first half of 2020, 8.3% of DC
plan participants changed the asset allocation of their account balances,
compared with 6.1% during the first half of 2019 and 7.7% during the first half
of 2009.
Regarding contributions, only 5% of DC plan participants changed
their asset allocation, the ICI says, compared with 3.6% in the first half of
2019 and 9.3% in the first half of 2009. And Vanguard found that 95% of
participants in its small business retirement plans did not make a single trade
between January and June 30 of this year.
And even with the stock market gains in August, 401(k)
investors were light traders, according to the Alight Solutions 401(k) Index.
There was just one day of what that index reckons as “above-normal” trading
activity[1] and three days of low trading activity—a pattern very much in line
with the prior month, but in contrast with the first six months of the year
amid the volatility associated with the COVID-19 pandemic.
When trades did happen, participants trended toward fixed
income from equities—perhaps looking to lock in some of their market gains. At
month’s end the average 401(k) balance of older (age 55-64) workers with more
than 20 years of tenure, rise 4.2%, and was up 10% year-to-date, according to
estimates from the nonpartisan Employee Benefit Research Institute (EBRI). That
cohort’s balances[2] are generally more influenced by market moves than
contributions.
Alight reports that on average, (just) 0.016% of 401(k)
balances were traded daily, with those transfers that did occur favoring fixed
income funds on 19 of 21 trading days during August. Bond funds drew more than
half (58%) of the transferring funds ($335 million) during the month, with
stable value attracting another 27%. Self-directed brokerage windows captured 8%.
Those transfers came from large US equity funds (25%),
mid-US equity funds (21%) and company stock (21%).
As for new contribution flows:
47% - target date funds
20% - large US equity funds
7% - international equity funds
Withdrawals and Loans
“We see a slight increase in withdrawal activity following
the onset of economic volatility and hardship, but the increase is much smaller
than you might expect, given the severity of the COVID-19 economic downturn,”
explains Sarah Holden, ICI senior director of retirement and investor research,
and coauthor of the report. “These assets represent a pot of money that savers
have earmarked for retirement and they have consistently demonstrated that they
generally stay the course to reach that financial goal, even during challenging
economic situations.”
In fact, ICI’s data shows that in the first half of 2020,
only 2.8% of DC plan participants took withdrawals, compared with 2.5% in the
first half of 2019. Levels of hardship withdrawal activity also were low, with
only 1.1% of DC plan participants taking hardship withdrawals during the first
half of 2020—the same share of participants as in the first half of 2019.
Vanguard also reports low levels of withdrawals, noting that
participant withdrawal activity remained low on an absolute basis, with only
1.3% of Vanguard Retirement Plan Access (VRPA) participants taking a withdrawal
in the first six months of the year. Although a low figure, the study notes that
the withdrawal rate is up slightly when compared to the first six months of
2019, in which 0.7% of participants took out a withdrawal. Of the 2020
withdrawals, 30% were Coronavirus-related distributions under the CARES Act.
The recordkeepers the ICI surveyed identified 2.9% of DC
plan participants as taking Coronavirus-related distributions during the first
half of 2020, under the CARES Act provisions that were enacted in late March.
DC plan participants’ loan activity also edged down in the
second quarter, according to ICI’s study. At the end of June 2020, 15.6% of DC
plan participants had loans outstanding, compared with 16.3% at the end of
March 2020 and 16.1% at year-end 2019. This may reflect the use of CRDs instead
of loans, according to the ICI.
Participation and Deferral Rates Rise
By contrast, participation and deferral rates rose slightly
in the first six months of 2020, according to the ICI, with the number of
participants with professionally managed allocations holding steady, indicating
participants remained disciplined throughout the volatility, the study notes.
As of June 30, 2020, 67% of VRPA participants were invested in a professionally
managed allocation, identical to the percentage at year-end.
Plan-weighted participation rates (calculated by taking the
average of participation rates among a group of plans) were 74% through June
2020, up from 72% at year-end. And participant-weighted participation rates
(calculated as if all employees in Vanguard-administered plans were in a single
plan) were 63%, compared with 59% at year-end. Vanguard’s data also shows that
the average deferral increased from 7.1% at year-end 2019 to 7.6% by June 2020.
Moreover, the study shows that, as of June 30, 2020, 78% of
new plan entrants hold a single target date fund, compared to 63% of
participants overall, which was the same as in 2019.
Footnotes
[1] A “normal” level of relative transfer activity is
defined as when the net daily movement of participants’ balances as a percent
of total 401(k) balances within the Alight Solutions 401(k) Index equals
between 0.3 times and 1.5 times the average daily net activity of the preceding
12 months.
[2] The average 401(k) balance of younger (25-34), less
tenured (1-4 years) workers—where contributions have a larger proportionate
impact—is now up 17.7% year-to-date, having risen 5.7% during August.
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