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10 years later: Defined Contribution

Participants climb out of investment abyss

Jean Young thinks some executives most likely were surprised at the restraint shown by DC participants.

Changes in plan design, bull market aid recovery

Whether paralyzed by fear, governed by inertia, or heeding an inner voice that counseled "stay the course," defined contribution participants appear to have overcome the initial jolt to their retirement savings accounts during the global financial crisis of 2008-09.

Plan sponsors aided the resurrection via plan designs that added automatic features and target-date funds, and incorporated greater use of qualified default investment alternatives, defined contribution researchers and industry members said. Market appreciation played a big role, too.

Data from Alight Solutions collected from its record-keeping clients show the average participant retirement account plunged nearly 29% to $57,000 at year-end 2008 from the previous year. It wasn't until 2012 that the average account balance exceeded the 2007 level, climbing to $81,000.

By the end of last year, the average account balance was $117,000.

During this same period, the percentage of plans offering auto enrollment climbed to 58% in 2009, from 34% in 2007. It reached 68% last year, according to an Alight survey of clients and non-clients.

Other researchers noted that patient participants — whatever their motivation — coped better than their jittery peers.

"People didn't know what to do," said Lori Lucas, president and CEO of the Employee Benefit Research Institute, Washington. "Many stayed the course."

Ms. Lucas pointed to a 2015 research report by EBRI and the Investment Company Institute that showed consistent participants in 401(k) plans had more than double the average account balances of all participants in the EBRI-ICI database between 2007 and 2013. Among the consistent group, the average account balance dropped 25.8% in 2008. Even so, the annualized growth rate was 10.9% from 2007 to 2013.

"The sponsors may have been surprised at how well-behaved the participants were," said Jean Young, senior research analyst at the Vanguard Center for Investor Research, Malvern, Pa. "We saw that by and large participants stayed the course. We did not see people panicking."

It took a few years for average asset allocations among Vanguard's DC clients to approach pre-crisis levels. Annual Vanguard surveys showed a drop in overall equity allocation to 61% in 2008 from 73% in the previous year, while the cash allocation rose to 23% from 15%. However, by 2011, the cash allocation was 12% and the total equity allocation — equity funds, equity components of target-date and balanced funds, and company stock — was 71%. Last year, equity was up to 75% and cash was down to 6%.

More diversified accounts

Post-crash, participants' accounts became more diversified and less extreme.

In 2008, 11% of Vanguard participants had more than 20% of their account balances in company stock; the percentage dropped to 5% last year. During the same period, the amount of participants with 90% or more of their retirement money in equities declined to 11% from 17%. The percentage of participants investing solely in fixed income and/or cash also dropped to 3% from 11%.

The accounts also became less subject to volatility, thanks in part, to the reduced reliance on employer stock.

In 2001, Alight Solutions reported 45% of plans with employer matches required the matches to be in company stock. The rate dropped to 23% in 2007, 17% in 2009 and 11% in 2017. The primary trigger affecting company stock was most likely due to events such as the 2001 bankruptcy filing by Enron Corp., said Robert Austin, the Charlotte, N.C.-based director of research for Alight Solutions.

Peg Knox recalled that 401(k) plan participants fled to the safety of money market and/or stable value funds when she was manager of global retirement for Bechtel Corp., Reston, Va. Pre-crisis, about 10% of plan assets was in these funds; post-crisis, it was 30%.

"Then inertia set in and they missed the market's rise," said Ms. Knox, who held the Bechtel job for 15 years before becoming chief operating officer of the Defined Contribution Institutional Investment Association, Washington, in February.

The allocation percentage of these investments dropped back to approximately 10% by year-end 2011, thanks primarily to the Bechtel plan conducting an investment re-enrollment in March 2010 into a managed account QDIA.

From her perch at DCIIA, Ms. Knox said large DC plans are better equipped to handle a similar market crisis today, thanks to the use of QDIAs, better participant communication, more education about long-term investing and an overall message cautioning against panic.

A mature industry

"The defined contribution industry has matured," said Ms. Knox, referring to more documentation on decision-making and other fiduciary-related improvements.

Since the crisis, "fiduciaries are more focused on market volatility," she added. And for good measure, ERISA lawsuits "keep sponsors focused."

Despite the comeback for account balances, EBRI's Ms. Lucas noted plan sponsors sometimes thwarted participants' efforts by, for example, cutting or suspending the employer match during the Great Recession.

Even though many reintroduced the match "after the economy stabilized," others failed to employ "creative" approaches to the match such as "a more robust linking" to auto enrollment or to stretching the match, she said. (A hypothetical stretch would be moving from $1 for each dollar of participant contribution up to 3% of annual pay to 50 cents for each dollar of participant contribution up to 6% of annual pay.)

Several researchers have noted that leakage remains persistent. Among Alight Solutions' record-keeping clients, 22% of participants reported outstanding loans in 2006, which peaked at 28% in 2010. The rate was 24% last year.

Despite some sponsors' efforts to place restrictions on 401(k) loans, "employees will tap the 401(k) when they can," Mr. Austin said. Restrictions include reducing the number of loans a participant can take, or establishing a waiting period between the time one loan is paid off and the next loan may be taken. Sponsors remain reluctant to eliminate or drastically curb the loan option, he said.

Retirement insecurity remains

Even though some statistics shows overall improvements in the 401(k) system since the global financial crisis, other research shows retirement confidence is the same today as it was just before the market crash.

In 2007, Transamerica Center for Retirement Studies found that 64% of workers offered a 401(k) plan said they were very confident or somewhat confident they would be able to retire with a lifestyle that they considered "comfortable," according to research prepared for Pensions & Investments. During the depth of the recession, that confidence dropped to 45%. It rose to 67% in 2014 and drifted back to 64% last year. The research covered employers with 10 or more workers.

Account balances are growing, participation rates remain strong and sponsors are "continuing the momentum" of plan-design improvements, yet several issues affect participants' retirement confidence, said Catherine Collinson, president and CEO of the Transamerica Center.

Key culprits are loans, early withdrawals, hardship withdrawals from their retirement accounts and insufficient emergency savings. "Many haven't set aside enough," she said. "Debt is a very dark shadow lurking over workers."

A call for more

Despite the improvements in plan design and communication, DC industry members said plan executives could do more to help participants for future slumps.

Sponsors need more transparency for their plans, said John M. "Jack" Towarnicky, executive director of the Plan Sponsor Council of America, Chicago.

"Most participants don't know the specific allocation in their target-date fund," he said.

A major correction "may surprise participants, especially older workers who are approaching their target date," he added. "PSCA surveys confirm that few sponsors made changes in anticipation of increased involuntary terminations. So leakage may be as high or higher than occurred in 2007-2009."

Phyllis Borzi said some sponsors have consolidated investment lineups to make it easier for participants. "Too much choice is not a good thing," said Ms. Borzi, who served as assistant secretary of labor for the Employee Benefits Security Administration from July 2009 to January 2017. "People don't join because they are terrified of too many choices."

Sponsors also must continue educating participants about investing for the long term because "there's still a real financial literacy problem," said Ms. Borzi, noting that "the data show that people trust their employers more than anyone else" regarding retirement.

Plan executive "can't lose sight that these folks trust them and need their help," she added. "They need simple straightforward communication."