Participants shake off challenging year

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.

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.

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.

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.