Great Challenges Teach Important Lessons

Here Are Some Emerging From 2020

On the surface, retirement readiness did not suffer significantly in 2020, according to a close examination of the 1.1 million participants in 1,076 plans reviewed for a recent white paper.

Of course, the market experienced significant dips in the first quarter of 2020, but results were broadly positive the rest of the year. Overall, year-over-year retirement readiness was down fewer than two percentage points — concerning, but not devastating.

The paper, John Hancock’s State of the Participant 2021, examined data for the year ending September 30, 2020, digging deeper to see how participants reacted to 2020’s challenges. The information may help plan sponsors shape ongoing communication efforts.

Lesson: Don’t panic

Among the key results was that very few participants moved money out of equity investments. Those who did, moving their money out of stocks and into a cash equivalent, unwittingly locked in their losses. Participants who took a wait-and-see approach, on the other hand, found their account balances returning to levels at (or even above) where they were immediately prior to the lockdowns.

There is a lesson here for ongoing plan communications: even when the unexpected occurs, panic-driven decisions are seldom best.

Among the participants studied for the paper, very few took money from their 401(k) plan accounts using the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Just 3.4% of participants took a distribution, and even fewer (0.15%) took a COVID-related plan loan. On average, distributions were $20,768 and loans were $16,699.

Lesson: Look at individuals, not just statistics

Although the numbers of participants taking money from the plan were low, the impact on the individuals could be significant. The report calculated the net effect on potential retirement savings at -13% for a participant in his or her 30s; had they not taken a distribution, the projected balance at retirement was $895,403, compared to $779,242 with the distribution.

Another key takeaway from the research is a reminder to look at participant behaviors, not just account balances. By figuring out which participants are most impacted by the pandemic, plan sponsors can offer targeted help to get them back on track.

Lesson: Aim high

In a year of dramatic changes, it’s encouraging to see that some things remain stable. One thing that has not changed is receptiveness to plan auto features. In fact, don’t be afraid to set a default contribution higher than the typical 2% or 3%. According to this research, plans that set their autoenrollment default contribution rates lower tend to have higher opt-out rates. The 2021 report shows that 14.2% of employees opted out when the default contribution rate was set at 2%, but when it was set at 7% of pay, just 1.6% opted out. The opt-out rate hovered around 9% for most other default contribution levels (1%–8%). Higher default contribution rates can help aim employees toward greater retirement security, so it’s a strategy worth considering. Click here to view John Hancock’s State of the Participant 2021.