Can plan sponsors and advisors improve retirement readiness?
Findings from John Hancock's report on plan participant retirement readiness show areas worth monitoring as sponsors and advisors keep up efforts to help savers.
Although the role of financial advisers is to help their clients plan for the unexpected, no one could have anticipated a year like 2020. The challenge now is to look at the impact of the pandemic on retirement planning and provide sound strategies to help clients achieve their objectives.
Related: 7 ideas to improve retirement plan design
In a new white paper, John Hancock looked at both retirement readiness and recommendations for improvement for defined contribution plan sponsors.
It defines retirement readiness as the expected ability of a participant’s current strategy to replace at least 70 percent of their preretirement earnings. Researchers reached several conclusions:
Given the widespread impact of the pandemic on personal finances, the dip in retirement readiness, from 50 percent to 48 percent, doesn’t seem too alarming, although it’s certainly worth monitoring closely.
Digging a little deeper, most participants below age 50, along with those earning between $50,000 and $150,000 per year, remain on track for a secure retirement.
Older workers and those at higher salary levels appear to be facing a steeper climb. However, many people in these categories may have outside retirement assets that aren’t included in calculations, and higher earners are limited by IRS contribution limits.
In the first quarter of 2020, every sector of the stock market dropped by double digits, led by plunges in small- and mid-cap U.S. stocks. While the broader economy continued to bear the weight of the COVID-19 pandemic, things turned around quickly for the market.
“The approach we saw most of our participants take is one we consider a textbook argument for investor patience,” the white paper said.
“As the market went on its wild ride, a very small percentage of participants moved money to non-equity investments. This allowed the larger population to avoid locking in losses when the market dipped in early spring. The big takeaway here is that the bear market of last winter was short-lived. Buoyed by a commitment to stay on strategy and some cooperation from the markets, participants reached the end of September in good shape and trending in the right direction.”
To help ease the personal financial challenges brought about by the COVID-19 pandemic, Congress included several provisions related to DC plans in its Coronavirus Aid, Relief and Economic Security Act. Two critical lifelines were the coronavirus-related distribution (CRD) and the expansion of the size and availability of plan loans, with adoption voluntary at the plan level.
The average loan amount was $16,699. A larger percentage, 3.4 percent, tapped their DC plan savings through a CRD, and the average withdrawal was $20,768.
Because transactions of this size can significantly hurt retirement readiness, it’s important to understand the scope of the issue, even if it’s having an impact on only a relatively small share of the population.
Although the number and percentage of participants compelled to tap their plan savings for immediate relief may be quite low, it’s important to identify these individuals and help them with strategies for getting back on track as soon as possible.
John Hancock offered several tips for overall retirement readiness:
- Look at behavior, not just account balance, as a guide to helping improve retirement readiness.
- Use targeted communication and guidance to help nudge appropriate behavior. Financial troubles caused by the pandemic haven’t hit every household evenly, but it’s important to know which participants’ retirement savings have taken the biggest hit and offer them direction in getting back on track.
- Be sure to consider the potential gaps that IRS contribution limits could create for higher earners. Nonqualified plans and specialized planning support are two options for helping address any potential shortfall.
“2020 showed us the impact that environmental factors can have on our lives, our businesses and Americans’ ability to save for a more secure future,” the white paper concluded. “But thanks to the efforts of plan sponsors and financial professionals, many participants either kept their retirement strategies intact or are positioned to recover in the months ahead.”
See the John Hancock website for the complete white paper, “State of the Participant 2021.”
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