2 things that helped stabilize retirement savings in 2020: study
T.Rowe Price findings show that despite market volatility and an economic shutdown, participants continued to save, and sponsors remained steadfast in helping employees.
The value of saving for retirement continued to resonate with both plan sponsors and participants despite the distractions and disruptions of the pandemic last year. In its recent Reference Point report, T.Rowe Price described several indicators that demonstrate the strength of retirement savings plans over the past 12 months.
For instance, the firm’s statistics reveal that pre-tax deferral rates increased from 7.6 percent in 2019 to 7.8 percent in 2020, the largest annual increase it has noted since 2016. T.Rowe Price compared participant deferral behavior with 2008, when the economy was impacted by the Great Recession, and found that the average deferral rate dropped 5 percent in 2008, a contrast to the increase seen last year.
“While the exact reason cannot be determined, the difference in average deferral rates may be due in part to the fact that today’s employers and employees are more in tune with the benefits and importance of retirement savings,” the report said. The change may be attributed to auto-increase features, increases in match ceilings, and better education among participants in financial wellness and retirement savings benefits.
Auto features
While the number of plans that added auto-enrollment features slowed in 2020, there was still an increase in the share of plans using them from 61.8 percent in 2019 to 62.2 percent in 2020, and auto increases also increased slightly from 79.8 percent of plans to 81.2 percent.
These auto features may be an important factor in the stability and growth of retirement savings during the tumultuous year, said T.Rowe Price. Plans that offer both types of auto features have balances that are on average 8 percent higher than plans that don’t offer them.
Default deferrals
In addition, increased default deferrals also have helped retirement savers increase their balances, said the report. During the past year, plans that had previously implemented auto-enrollment increased their default deferral rate from 4.4 percent to 4.5 percent. Plans offering auto-enrollment for the first time last year started their default deferral rates on average 7 percent higher than they did in 2019.
The study noted, however, that while slightly more plans use an opt-in model than an opt-out model, participants are five times more likely to use an auto-increase service in plans that use an opt-out model.
Roth options
Roth options grew in popularity last year, according to the report, with 80 percent of plans offering this option at the end of 2020 compared with 77 percent in 2019. Ten percent of eligible plan participants took advantage of this feature last year, up from 8.5 percent the previous year, the report found. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which accelerates distributions to certain beneficiaires, may have made Roth 401(k) contributions more attractive because of the tax-free treatment of qualified Roth distributions, the report said.
Pandemic-caused plan changes
During the pandemic, most plans stayed the course in terms of plan design. When plans did require a pivot, it typically impacted company matches, said the report. Between 2019 and 2020, the percentage of plans offering a match declined from 82 percent to 77 percent. The largest impact in this area was for plans between 1,000 and 5,000 participants as well as plans with assets between $150 million and $500 million. The retail trade and leisure and hospitality industries — both of which were significantly impacted by the pandemic — reduced matched contributions by 11 percent and 17 percent respectively last year.
On a positive note, almost half of plans that had suspended their match during the height of the pandemic had reinstated part or all of their original plan design within the first month of this year, the report said.
Participants did take advantage of loans and withdrawals to cope with the financial pressures of the pandemic, however, the report found they also continued to make retirement plan contributions during the crisis. Year over year, loans and hardship withdrawals were actually down 37 percent last year, but when coronavirus-related distributions (CRDs) are factored in, transactions nearly doubled. The report found there were twice as many CRDs as there were loans and hardship withdrawals combined last year.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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