Defined contribution plan participants weather balance-crushing markets

Taking the pulse of defined contribution plans, a new report finds several reasons for optimism, including rising participation and contribution rates, as well as a decline in plan leakage.

That’s according to Fidelity’s latest Building Financial Futures report.  Analysis of plan data finds employee contribution rates rose to 14 percent, the report notes, and “potential for plan leakage may be tapering,” as new loans and withdrawals decreased.

The average plan balance did decline however — by almost 7% – which Fidelity attributes to recent market performance. Long-term savers, such as Gen Xers who have continuously contributed to their DC plan for 15 years, still managed to accrue an average balance of $265,151 in the first quarter of 2022.

Among the highlights of the report:

Investment lineups are changing.

• The number of investments offered is declining, down from an average high of 23 in 2012, to a little over 15 now.
• 70 percent of millennials and 85 percent of Gen Zers are 100 percent invested in a target-date fund.

Increased use of workplace managed accounts. The percentage of plans offering a workplace managed account has continued to rise.

• Although plan sponsor adoption of managed accounts has grown, participant adoption still is relatively low.
• Half of larger plans have adopted a workplace managed account.

Contributions holding steady. Despite unprecedented times, few employees or employers have decreased savings rates.

• More than 8 percent of participants contributing to their 401(k) plan decreased their deferrals during the first quarter of 2022, up from 7.5 percent the year before and 7.6 percent in the fourth quarter of 2021.
• 68 percent of deferral increases were due to auto-increase programs in the first quarter of 2022.

DC plan participation continues to climb. Auto-enrollment is a changing force as plan participation continues to increase.

• Despite the ability to opt out of auto-enrollment, 90 percent of employees stay in.
• Younger generations are participating more, perhaps as their presence in the workforce solidifies. Gen Z participation rate increased to 15.8 percent. By comparison, 2019 showed 12.6 percent participating.

Increase in Roth 401(k)s. In just the last five years, the percentage of plans offering a Roth 401(k) has increased by 26 percent, Fidelity reports, and with this option being increasingly popular with younger participants, contributions also are on the rise.

• Gen Zers are the most likely generation to be contributing to Roth, increasing from 12 percent to 14 percent.
• 30 percent of plans offer employees the ability to convert pretax assets to Roth, twice the number that offered this option in 2017.

Loans and withdrawals increasing. With the observed reduction in activity immediately after the CARES Act provisions ended in the fourth quarter of 2020, newly initiated 401(k) loans and withdrawals in the first quarter of 2022 continue to return to pre-CARES levels.

• Outstanding loans and average loan amounts are down. The initiation of new loans and withdrawals increased, although outstanding balances and average amounts were down.
• Despite recent increases newly initiated loans in 2021 vs. 2020, the percentage of workers with an outstanding 401(k) loan dropped from 19.7 percent to 16.6 percent.
• The average amount for loans initiated in the first quarter of 2022 was $10,740, up from $9,870 in the fourth quarter of 2021.

“For many, it can be tempting to make changes to their accounts during times of market downturn,” the report concluded. “Employers can help those in their workforce who are nervous or on edge to stay the course. When participants have a well-defined plan targeted to their individual goals and financial situation, they can focus on the long term instead of reacting to market volatility.”