Defined contribution plan participants were able to cope
with — and even shake off — the economic impact of the coronavirus as they
increased their retirement savings balances, according to Pensions &
Investments’ annual survey of the largest U.S. retirement plans.
Among the 200 largest retirement plans, DC assets rose 17.6%
to $3.31 trillion from $2.81 trillion for the 12 months ended Sept. 30. Over
five years, assets grew by 69.5%.
Aggregates and averages, however, don’t tell the whole story
about participants’ and sponsors’ responses to the coronavirus, and they don’t
illustrate the damage to individuals from lost jobs, lost pay, lost savings and
lost lives.
However, they can illustrate how participants and sponsors
reacted to the turbulent times through investment choice, plan design, market
appreciation and inertia to build retirement savings. The words “resilient” and
“stay the course” popped up repeatedly in P&I’s interviews with
researchers, consultants and record keepers.
If participants were auto-enrolled in a plan with a deferral
that resulted in the full corporate match, agreed to automatic escalation and
invested in a target-date fund, “that cures a lot of the problems,” said David
Stinnett, principal and head of the strategic retirement consulting group at
Vanguard Group Inc., Malvern, Pa.
Last year, participants “most likely did well,” said Mr.
Stinnett, if they followed the above strategies. “Your retirement readiness is
looking pretty good.”
Mr. Stinnett exhorted sponsors to review DC industry
participant data from 2020 and 2021. “If you haven’t adopted an auto plan
design, you should,” said Mr. Stinnett as he described these strategies as “the
self-cleaning oven of plan benefits.”
A Feb. 2 Vanguard report showed the average account balance
among participants in Vanguard’s record-kept plans rose 10% for the year ended
Dec. 31 while the median balance rose 6%. Excluding those in managed accounts,
8% of participants made a trade in their account last year vs. 10% in 2020. The
report, which covers 1,700 plans with 5 million participants, also said 17% of
participants voluntarily increased their account deferral rate while 7%
decreased their deferral rate. Another 25% increased their deferral rate via
auto escalation. “These behaviors are very much in line with previous years,”
the report said.
For the DC sponsors among the 200 largest retirement plans
tracked by P&I, employer contributions rose 11.8% to $20.9 billion for the
12 months ended Sept. 30 and 14.2% over five years. Employee contributions rose
9.5% to $49.4 billion over the year and 20.2% over five years.
Power of inertia
Many participants probably enjoyed higher account balances
by doing nothing or doing very little as the rising tide of market appreciation
lifted retirement account boats.
“A lot was due to Wall Street setting record highs,” said
Robert Austin, the Charlotte, N.C.-based director of research for Alight
Solutions. The S&P 500 gained 30% for the 12 months ended Sept. 30. “Most
stayed the course,” Mr. Austin said. “They have a long-term outlook. There was
not a long-term detriment due to the coronavirus.”
Low interest rates, meager returns for fixed-income
investments, rising inflation and stock market gains led to 401(k) plan
participants taking on more equity last year than in any year since 2000, Mr.
Austin said in referencing results of Alight’s index of 401(k) plan participant
behavior.
The equity allocation was 70.7% last year, compared with 73%
in 2000, the highest ever for the participant index, which was started in 1997
and covers more than 2 million participants in plans with more than $200
billion in assets record-kept by Alight. (The lowest equity allocation was
52.9% in 2008, amid the depths of the recession. In 2019, before the onset of
the coronavirus, the equity allocation was 68.1%.)
Many participants didn’t have to act to watch their account
balances grow — a testimony to inertia, Mr. Austin said. The net participant
trading rate last year was 0.53% of account balances, which was the lowest in
the index’s history. By contrast, trading activity in 2020 was 3.51% of account
balances when markets were more volatile.
Mr. Austin said the high equity allocation was bolstered by
the equity components of target-date/target-risk funds as well as by
stand-alone investment options.
Target-date/target-risk funds are often the biggest
recipient of contributions tracked by the Alight index. Among 13 asset classes,
they accounted for 46% of inflows last year; large-cap domestic equity was
second with 21%, on par with 2020.
Embracing equity
The P&I survey also found an embrace of equity. Among
the 200 largest retirement plans, a combination of company stock, domestic
equity and international equity accounted for 50.9% of the corporate DC assets
for the 12 months ended Sept. 30. For public plans, the combination of domestic
and international equity represented 47.7%.
Target-date funds, which are counted as a separate
allocation by P&I, accounted for 23.6% of corporate DC allocations among
the top 200 retirement plans and 23.3% among public plans.
Among the 200 largest retirement plans surveyed by P&I,
the target-date assets in DC plans rose 31.9% to $444.7 billion for the 12
months ended Sept. 30 and 117% over five years. The P&I survey also
recorded a surge in passive indexed equity investing — up 35.5% to $782.3
billion for the 12 months ended Sept. 30, and up 87.9% over five years. Neither
result is a surprise, consultants said.
An annual client survey by NEPC showed target-date funds
accounted for an average of 28% of plan assets in 2011, rising to 44% last
year. Ninety-five percent of last year’s plan sponsor respondents are using
target-date funds as the qualified default investment alternative, according to
the survey report that will be published later this month. The survey covered
137 plans with a total of $230 billion in assets and 1.6 million participants.
“Menus are moving more toward index funds,” William Ryan,
the Chicago-based partner and head of defined contribution plan solutions at
NEPC LLC, wrote in an email.
Thirty-eight percent of client plans offer index target-date
funds and 70% of those plans offer a tier of three or more index funds in their
core menu.
The NEPC survey found that the percentage of actively
managed target-date funds dropped to 46% last year from 58% in 2016. The
percentage of index target-date funds climbed to 42% from 34% during this
period, and the percentage of blended target-date funds (a mixture of active
and passive management) grew to 12% from 8%.
Consultants say index funds appeal to sponsors because they
are cheaper than actively managed funds, it’s hard for an active manager in
some asset categories such as large-cap U.S. equity to appreciably beat an
index fund and because sponsors fear litigation risk from picking
underperforming and/or high-fee funds.
Mr. Ryan added that participants’ overall higher equity
holdings last year was mostly due to stock market appreciation, with a boost
from inertia. “A lot of the equity allocation increase is a function of
participant’s long-term buy and hold behavior,” he wrote.
What’s ahead?
As the coronavirus pandemic enters its third year, DC
industry members said they doubt sponsors will make dramatic design changes,
continuing their approach in 2021 and maybe revisiting ideas of 2019 that they
put on hold.
“While inflation began to dominate headlines as the economy
picked up and supply chain issues presented themselves, sponsors really didn’t
react from an investment menu perspective,” Mr. Ryan wrote. “The topics of
retirement income and ESG may have been put on the back burner by some sponsors
who were contending with the CARES Act and layoffs in 2020 but agendas were
business as usual in 2021.”
DC consultant Peter Nadeau said his conversations with
clients indicates a willingness to discuss enhancing auto features.
“There’s more room for improvement for auto enrollment and
there’s more room for improvement for auto increase,” said Mr. Nadeau, the
Windsor, Conn.-based partner and senior consultant for Fiducient Advisors.
Raising the auto features cap, now often at 10% of annual salary, is another
possibility, he added.
Vanguard, which advocates a 15% annual participant
contribution via auto features, noted some plan design gains last year.
Fifty-six percent of plans allowing for employee-elective deferrals had auto
enrollment vs. 54% in 2020, its research report said.
Fifty-eight percent of plans with auto enrollment defaulted
participants into the plan at 4% of annual salary or higher, “a trend that has
continued to increase every year,” the report said. Seventy percent of the
plans have auto escalation.
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