Great Challenges Teach Important Lessons

Great Challenges Teach Important Lessons

August 02, 2021
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Lesson: Don’t panic

Among the key results was that very few participants moved money out of equity investments. Those who did, moving their money out of stocks and into a cash equivalent, unwittingly locked in their losses. Participants who took a wait-and-see approach, on the other hand, found their account balances returning to levels at (or even above) where they were immediately prior to the lockdowns.

There is a lesson here for ongoing plan communications: even when the unexpected occurs, panic-driven decisions are seldom best.

Among the participants studied for the paper, very few took money from their 401(k) plan accounts using the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Just 3.4% of participants took a distribution, and even fewer (0.15%) took a COVID-related plan loan. On average, distributions were $20,768 and loans were $16,699.

Lesson: Look at individuals, not just statistics

Although the numbers of participants taking money from the plan were low, the impact on the individuals could be significant. The report calculated the net effect on potential retirement savings at -13% for a participant in his or her 30s; had they not taken a distribution, the projected balance at retirement was $895,403, compared to $779,242 with the distribution.

Another key takeaway from the research is a reminder to look at participant behaviors, not just account balances. By figuring out which participants are most impacted by the pandemic, plan sponsors can offer targeted help to get them back on track.

Lesson: Aim high

In a year of dramatic changes, it’s encouraging to see that some things remain stable. One thing that has not changed is receptiveness to plan auto features. In fact, don’t be afraid to set a default contribution higher than the typical 2% or 3%. According to this research, plans that set their autoenrollment default contribution rates lower tend to have higher opt-out rates. The 2021 report shows that 14.2% of employees opted out when the default contribution rate was set at 2%, but when it was set at 7% of pay, just 1.6% opted out. The opt-out rate hovered around 9% for most other default contribution levels (1%–8%). Higher default contribution rates can help aim employees toward greater retirement security, so it’s a strategy worth considering.

John Hancock’s State of the Participant 2021 can be viewed here: https://tinyurl.com/JH-2021-State.


At Diversified Financial Advisors, we believe with the right plan design, we can create successful retirement outcomes for your business and employees.

Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. 

RP-722-0621 Tracking #1-05151058