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Two years ago at this time, the forecast for retirement plans was grim: Employees would drain their 401(k)s, and millions of Americans would stop contributing to their retirement plans as their employers halted their match. Now that the 2020 plan year data is in, says analyst Eric Ryles of ALM Global's intelligence team, Judy Diamond Associates, we see it confirming some predictions, but also offering some surprises.
401(k) contributions in 2020: Plan size and match matter
For JDA's sixth annual 401(k) Benchmark Report, Ryles and his team examined 2020 plan year Form 5500 data from approximately 600,000 active 401(k) plans with at least $3,000 in plan assets and at least one active plan participant. These plans cover about 66 million eligible workers and total $6.8 trillion dollars in assets. (Note: Like JDA, BenefitsPRO is also a unit of ALM.)
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The infographic below shows employer and employee contribution levels for small plans all the way up to mega plans.
One point stands out — small plan contributions are often bigger than medium or even some large plans. Ryles addresses this in the benchmark report, noting among other things that smaller employers that do offer a retirement plan tend to see their workers as members of "the family" and want to offer the best plan they can. Ryles also explains another find, which at first glance is startling: The median value for employee contributions actually increased during the pandemic.
"More highly compensated folks kept their own contributions steady," Ryles says. However, "lower-income workers who had only been contributing a small amount to their 401(k) plan stopped entirely. Thus, they fell out of the pool for analysis."
"The median value changed as you lost the people putting in the bare minimum to get the match versus the people putting in the maximum no matter what," Ryles says. "When you saw companies suspend the match, when that incentive went away, the people who were contributing just enough to get the match stopped contributing."
This could mean that the employer match as an incentive is important, he says.
Beware of looking at rate of return in a vacuum
Additionally, Ryles says, the data reveals a "rate of return weirdness for off-calendar plans" — that is, the approximately 8% of plans that end their plan year on March 31 or June 30.
"Remember what the stock market was doing during March of 2020," Ryles says. "For purposes of calculating Rate of Return, those plans 'accidentally' locked in what looks like a terrible performance. In reality, they fared no worse nor better than any other plan that year. However, because their plan year came to end right in the trough of the market, it looks like they had just an awful year."
The lesson here is one every analyst knows: Look at data in context. Otherwise, "unwary advisors who look at the rate of return in a vacuum might make a very poorly thought out pitch to a plan sponsor, highlighting what looks like bad asset management," Ryles notes.
The data for the JDA report originated with the Form 5500 ERISA disclosure form. The data was then warehoused, cleansed, and analyzed through JDA's Retirement Plan Prospector platform, a 401(k) analysis and lead generation tool.
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