401(k) plan participants taking fewer loans, withdrawals from their plans
Retirement plan sponsors are doing a good job of educating employees about how their plans work —and why they should continue saving through their 401(k)s — new research from the Investment Company Institute indicates.
According to its report, “Defined Contribution Plan Participants’ Activities, First Three Quarters of 2016,” the ICI culled information from the latest recordkeeper data and found that withdrawal activity from defined contribution plans remained low during the first nine months of 2016. Just 2.8% of DC plan participants took withdrawal, compared with 2.9% during the same time period in 2015. Hardship withdrawals were also low at 1.2% of DC plan participants, compared with 1.3% during the first three quarters of 2015.
“From the plan sponsor perspective, the fact that so few folks take withdrawals and so many folks keep on contributing — each time we’ve taken the survey, snapshot after snapshot — highlights that the messages from employers are getting through [to employees],” says Sarah Holden, senior director of retirement and investor research at the ICI.
As of September 2016, 17% of DC plan participants had loans outstanding from their workplace retirement plans, compared with 17.4% at year-end 2015, according to ICI data. The ICI has tracked 401(k) loan activity since 2002. In 2008, before the Great Recession hit, only 15.3% of 401(k) plan participants had outstanding loans. That jumped to 18.5% by 2011 and has slowly crept down since that time.
Employers include a loan feature in their 401(k) plans because it offers “flexibility or a safety valve for their workers,” says Holden. “They recognize that people might be worried if they put into their 401(k), what if an emergency happens down the road? It is a way to have access to their money but in a way you can repay yourself and put it back in.”
Loan numbers increase in the wake of financial stress, usually with a bit of a lag, she says.
The ICI also released individual survey data to find out how plan participants view their 401(k) or other defined contribution plan. One of the findings that stood out as important to plan participants was the tax treatment of their workplace plans. Being able to contribute to their plans pre-tax is a major incentive, Holden says.
“Even folks who don’t have an IRA or DC account now think that the tax advantages should be preserved,” she says. “It’s a recognition of the importance, of highlighting that saving for retirement is an important goal and we are going to give those savings special treatment to encourage folks to engage in that.”
Both the recordkeeper data and the individual survey data point out that people like having choice in, and control over, investments in their plan.
The average plan offers 28 investment options, including target-date funds, index, active, equity and bond funds.
“A huge part of the success of the 401(k), and I applaud plan sponsors for thinking about this, is they kept the choice. There are people who embrace choice,” she says, adding that many companies now include a target-date fund in their list of options, which is a good way for people who don’t want to choose, to get a professionally managed, diversified and frequently rebalanced portfolio of investments.
According to a BrightScope and ICI study released at the end of 2016, 32% of plans offered TDFs in 2006. As of 2014, three-quarters of plans with at least 100 participants offered them.
“Without taking away people’s choices, they shined a light on a path that might be a good path for a whole bunch of people,” Holden says.
Plan design changes like automatic enrollment have also done a great job toward getting individuals to participate in their workplace retirement plan.