More than half (53%) of 401k participants at John Hancock Retirement are positioned to replace at least 70% of their current income in their retirement years, according to the company’s just-released 2022 State of the Participant report.
“In the wake of historically high savings rates and substantial gains in the stock market in 2020 and 2021, we saw improvements in retirement readiness within every age group in 2022″
Sue Reibel, CEO, John Hancock Retirement
A common benchmark of retirement readiness, this year’s most recent income replacement data sees an increase of nearly five percentage points from 2020 and the highest income replacement John Hancock Retirement has seen in the report since the data has been available.
“In the wake of historically high savings rates and substantial gains in the stock market in 2020 and 2021, we saw improvements in retirement readiness within every age group in 2022, with nearly 70% for those under age 40 on-track,” said Sue Reibel, CEO, John Hancock Retirement. “We are pleased to see these results in the data, and we are optimistic about maintaining these results over the long-term. We are confident that the best way to help plan participants progress towards their retirement goals is to provide them a workplace savings plan that gives access to the information, tools and resources they need to make sound savings and investing decisions.”
Auto features increase retirement readiness
As seen in past reports, the chances of achieving retirement readiness were highest when plan sponsors took advantage of both primary types of automatic plan features: auto-enrollment and the auto-escalation feature.
In 2021, plans that auto-enrolled eligible employees and included automatic annual deferral increases of 1% a year up to 10% achieved average plan-level retirement readiness of 65%—which is much better than the 52% for plans without any auto features.
The data in the report also found that an increase in the auto-escalation limit has a positive impact on retirement readiness. While a 10% cap has historically been the standard, approximately 60% of plan sponsors are now selecting limits of 15% or higher, with 25% and 15% being the most popular choices.
What’s more, the research found participants are open to saving more each year through auto-escalation. With each passing year, fewer participants opt out of automatic-escalation over five years—with only 5% opting out of auto increases in year four—and only 3% in year five.
The opt-out data suggests that communicating in the first year of enrollment is vitally important to help participants understand the importance of saving more each year and the impact it can have on reaching retirement readiness goals as the most recent report shows more than half of participants opted out of auto-escalation in the first year of enrollment.
‘Great Resignation’ upends some participants
A large number of participants have had to make the extremely important decision of what to do with their retirement savings as they have left jobs in record numbers recently during the so-called “Great Resignation.” More than six in 10 (61%) of participants leaving their defined contribution plan elected to move their money directly to an IRA or a new employer’s DC plan.
However, almost four out of 10 of those leaving their plan cashed out their account—which exposed them to immediate tax liability, possible tax penalties and a step backward from their retirement goals. This represents an opportunity for plan providers to provide all departing employees with estimates of the amount they would save on current taxes as well as the potential growth they would experience by making a timely rollover or electing to remain in their current plan.
ESG funds and participants
More than one in 10 (11%) of defined contribution open architecture plans administered by John Hancock Retirement make environmental, social, and governance (ESG) funds directly available as an option for plan participants, with a total of 80 funds represented.
This number may grow in the future, as the U.S. Department of Labor proposed a change to ERISA in October 2021 that would officially allow fiduciaries to consider ESG factors in selecting funds for their DC plan lineups. The interest seen on ESG fund option adoption has taken place despite these rules not yet being effective.
Interestingly, while some industry trends have shown that younger participants would be attracted to ESG funds, John Hancock Retirement data shows the average age of those investing in these strategies as closer to 50 years of age. The latest report found 52% of participants with ESG funds are aged 50 and older.
Impact of a high inflation environment
Increasing inflation can have a negative impact on retirement plans. Investors may feel as though they’re facing the difficult decision of adding money to their portfolio in the short term, decreasing their income goals in retirement or postponing retirement. However, evaluating an investment strategy, such as stable value funds, can potentially offer a hedge against inflation.
Stable value funds seek to offer a higher yield than money market funds and short to intermediate bond-like performance—all with an insurance-backed guarantee. As the U.S. continues to deal with the highest inflation in decades, the unique advantages of stable value—including their guarantees and ability to help counter inflation—make them a potentially attractive option.
Building a retirement portfolio takes years of planning and discipline, and as the past few years have shown, plans can come under stress by any number of factors. Understanding the impact of inflation on portfolios can be an important tool to help investors plan for retirement.
“While the data showing gains in retirement readiness across age groups is very encouraging, we understand that economic conditions and each individual’s personal situation can present challenges. Our message is to stay committed to saving, consider increasing contributions when you are able and remain focused on your risk tolerance and time horizon when making investment decisions,” said Scott Francolini, Head of Strategic Relationship Management and Consulting, John Hancock Retirement. “We’re committed to continuing to work closely with plan sponsors and financial professionals to help support Americans along their journey to retirement readiness.”
Read the 2022 State of the Participant report here.
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