2021 Summer Reading on Retirement Planning

#Lifestyle Wealth


Vacation season is here and it’s a good opportunity to catch up on industry surveys that have been published recently. At the risk of oversimplifying, the results indicate that the retirement market’s pre-pandemic momentum and positive trends held up well—inertia is still working to participants’ benefit. Here are brief summaries from several major reports:

2021 Universe Benchmarks: How Workers Are Saving and investing in Defined Contribution Plans

Alight

Key findings:

  • The average plan balance is at an all-time high of $130,330. At the beginning of 2020, it was $122,150.
  • Trading volume was higher than previous years—2.2% of balances were traded in 2020 compared to 1.8% in 2019. Nearly all this activity occurred over a six-week period that started in mid-February.
  • The median return for investors during 2020 was 16.9%. Three-quarters of participants earned returns between 10% and 25%.
  • The average plan participation rate grew to 83%—a 2 percentage point increase from 2019.
  • The average contribution rate increased to 8.3% from 8.1%.
  • The percentage of people using target date funds decreased. For the first time, there were fewer people using target-date funds at the end of the year than there were at the beginning of the year. The percentage dropped from 76% to 72%.
  • Fewer people took loans, but more took withdrawals. Many opted to tap their balances by taking the special withdrawal provision in the CARES Act allowing people to repay their amount over a 3-year period.

Overall, the results provided mostly good news, according to Rob Austin, head of research at Alight. “There were many improvements in 2020, especially when one considers the financial impact that the COVID-19 pandemic had on the workforce,” he says. “There were improvements in participation rates, savings rates, and average plan balances. However, the median plan balance fell in 2020 and withdrawals were higher than normal because of the CARES Act. This shows that not all participants had gains in 2020.”

The Journey Toward Financial Freedom: How Americans Define Financial Wellbeing, How They Get There and What Stands in Their Way

Empower Retirement and Personal Capital

Key findings:

According to the report, the survey results point to four key themes that provide a deeper understanding about Americans’ financial wellbeing:

  • A strong majority agree that “financial health is more of an ongoing journey” (72%), rather than “achieving a specific milestone” (28%).
  • Financial wellbeing is rooted in “freedom and independence.” The vast majority (81%) say, “I will feel financially well when I have the freedom and ability to spend how I want to.”
  • Financial wellbeing can also feel elusive. A majority (60%) feel confident in their ability to achieve financial health, but only 48% feel financially healthy today. More than dollar amounts, what’s most associated with financial wellbeing is peace of mind (for instance, having enough to pay bills and meet spending needs).
  • Most need help on their journey to financial wellbeing. Nearly 7 in 10 (69%) face at least one roadblock. Lack of income (27%) and constant expenses (23%) are top barriers. What’s more, 76% of Americans say, “receiving helpful financial advice makes me more confident in my ability to achieve financial wellness.” And 69% believe “financial services companies need to re-define financial health to be more relatable and achievable.”

Stephen Jenks, Empower Retirement’s chief marketing officer, says that one key takeaway for plan advisors to note is that there’s no “one size fits all” state of financial wellbeing. “This really underscores the need for a personalized, holistic approach to financial planning and retirement savings,” Jenks says. “American workers said they want help on their journey to financial wellbeing. They want advice on getting past perceived and real barriers or roadblocks.”

How America Saves 2021 (20th edition)

Vanguard

Key findings (as of year-end 2020):

  • 54% of Vanguard plans had adopted automatic enrollment, including 74% of plans with at least 1,000 participants.
  • Automatic enrollment defaults have increased over the past decade. 57% of plans now default employees at a deferral rate of 4% or higher, compared with 30% of plans in 2011.
  • 62% of all Vanguard participants were solely invested in an automatic investment program—compared with 7% at the end of 2004 and 33% at year-end 2011. Fifty-four percent of all participants were invested in a single target-date fund; another 1% held one other balanced fund; and 7% used a managed account program.
  • Plans with automatic enrollment had a 92% participation rate, compared with a participation rate of 62% for plans with voluntary enrollment
  • Ninety-five percent of plans offered target-date funds at year-end 2020, up from 82% in 2011. Nearly all Vanguard participants (99%) were in plans offering target-date funds. Eighty percent of all participants used target-date funds. Two-thirds of participants owning target-date funds had their entire account invested in a single target-date fund.
  • During 2020, as market volatility increased, 10% of DC plan participants traded within their accounts, while 90% did not initiate any exchanges. On a net basis, there was a shift of 3% of assets to fixed income during the year, with most traders making small changes to their portfolios.
  • 5.7% of participants who had the option withdrew retirement assets through coronavirus-related distributions (CRDs). Hardship withdrawal activity was down 29%, and other non-hardship withdrawal activity was down 16%, compared with 2019.

Despite pandemic-induced disruptions, employees stayed the course, says Dave Stinnett, principal and head of strategic retirement consulting at Vanguard. “When we consider how dramatically COVID-19 affected the globe in 2020, it was encouraging to see that participants largely maintained an unwavering focus on their long-term savings,” says Stinnett. “90% of all participants stayed the course and did not initiate a trade in 2020. Pure target-date fund investors traded even less frequently in 2020 – only about 4% of participants holding a single target-date fund traded last year. Additionally, the average deferral rate increased slightly to 7.2% from 2019. This data demonstrates the important role automatic plan solutions continue to play in helping participants save for retirement.”

https://www.wealthmanagement.com/retirement-planning/2021-summer-reading-retirement-planning

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