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DC Plan Participants Fared Well in a Tough 2020: Study

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What You Need to Know

  • The percentage of John Hancock DC plan participants reaching retirement readiness dipped slightly with the pandemic.
  • Most participants under 50, and those earning $50,000-$100,000 a year, stayed on track for secure retirement.
  • John Hancock says 3.4% of plan participants took COVID-related distributions.

A study released Monday by John Hancock Retirement examines the retirement readiness of more than 1 million participants in John Hancock defined contribution plans in the pandemic era.

The study found that the percentage of participants achieving retirement readiness dipped slightly, from 49.6% on Sept. 30, 2019, to 47.9% on the same date in 2020.

“The data we observed into and through a challenging 2020 is actually quite encouraging,” Lynda Abend, chief data officer at John Hancock Retirement, said in a statement. “It reinforces the roles that participant engagement, plan design and the resilience of retirement savers play in keeping people on track toward a secure retirement.”

John Hancock defines retirement readiness at a plan level as the projected ability for participants to replace 70% or more of their workplace earnings in retirement. 

For the study, researchers derived data from John Hancock’s open-architecture platform, which included 1.1 million participants, 1,076 plans and $76.6 billion in assets under management as of Sept. 30, 2020. 

Key Findings

Considering the pandemic’s effect on personal finances, the dip in retirement readiness was not too alarming, but bears close monitoring, according to the study. 

Most participants younger than 50, along with those earning between $50,000 and $150,000 per year, remained on track for a secure retirement. Participants between 30 and 39 exhibited the most retirement readiness at 64%, followed by those younger than 30 at 58% and participants 40 through 49 at 52%.

The study found that average account balances tracked the market’s dip and recovery last year. Only a tiny percentage of participants moved money to non-equity investments when global equity markets suddenly plummeted in early spring. 

The vast majority benefited from the eventual rebound, and enjoyed average account balances that remained close to even in the period from March through September. 

Accounts held by those under 30 had the best average return over this stretch, at 5.1%. In contrast, account balances for those 60 and older decreased by 2.6%.

The COVID-19 pandemic created a group of participants in need of immediate guidance, according to the study. Last April’s Coronavirus Aid, Relief, and Economic Security Act included the coronavirus-related distribution and the expansion of the size and availability of plan loans, with adoption voluntary at the plan level. 

The pandemic-related distribution served as a financial lifeline for 3.4% of John Hancock’s participants, who took out an average of $20,768. 

John Hancock’s data analytics team calculated that these withdrawals, if not replaced in participants’ accounts, could reduce the plan savings they bring into retirement by as much as 10% to 13%.

The paper noted that, unlike pandemic-related loans from participants’ accounts, distributions do not carry an expectation of repayment, though the CARES Act provides a full three years for participants to replenish their accounts, without regard to yearly IRS deferral limits.

At the time the pandemic emerged, John Hancock Retirement rolled out an interactive planning tool for the plan participants the firm services. Seven in 10 participants who sampled the tool proceeded to complete a personalized retirement expense projection. 

About 20% of these DC plan savers increased their plan contribution on the spot, at rates that averaged from 4% for those between 40 and 49 to 5.2% for participants 60 and older.

For participants in their 30s, increasing deferral by 4 percentage points today could results in a six-figure rise in total savings at retirement, the study said.

The study found that the auto-increase feature is indispensable in helping shape a save-more attitude, and raising the default contribution rate can help give more new participants a needed nudge. 

The findings showed that plans that combined auto-enrollment and auto-increase had an 8-percentage-point advantage (19% in actual terms) in retirement readiness over plans with no auto features at all.

 

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