Vanguard’s latest analysis of defined contribution (DC) recordkeeping data from January through September 2020 suggests that, while there have been negative impacts on retirement readiness due to the COVID-19 pandemic, the response from participants has been better than expected.
Plan sponsors can take some credit for this finding, Vanguard says, noting that while CARES Act loan and withdrawal provisions caused some concern among plan sponsors about leakage from their plans, the data shows very few participants actually utilized the remedy provided.
The behavioral finance revolution that led sponsors to use negative elections, defaults, and human inertia to help drive better participant decisions, continues to improve participant outcomes. Once you default people into the plan at a high savings level, they largely don’t make changes, Vanguard noted in its recently published research, titled, “COVID-19, the CARES Act, and plan participants’ response.”
Participants are largely resilient and hard to deter from their long-term retirement goals. This is not a new learning about participant behavior, but it has now been “battle tested” in a very unusual environment.
Participation and deferral rates remained largely unchanged year-to-date through September when compared with the same period in 2019. To wit:
- 12% of participants increased their payroll deferral percentage, vs. 14% last year.
- 7% of participants decreased their payroll deferral percentage, vs. 6% in 2019.
- 3% of participants stopped contributing, the same as last year.
- 24% of participants saw deferral rates rise because of automatic increases, compared with 23% in 2019.
The research found that just 4.5% of participants withdrew assets from their retirement plan through a CARES Act-related distribution (CRD), while less than 1% of participants took a CARES Act loan. The median participant CRD distribution amount was approximately $12,000.
Hardship withdrawals and loan activity decreased year-to-date through September when compared with the same period in 2019. Hardship withdrawal activity was down 23% compared with last year and loan activity was down 28%.
Even those who did takes CARES Act distributions can recover from their retirement readiness gap by increasing their paycheck deferral amount by, on average, 1%, according to research Vanguard published earlier this year.
One other finding from the new research shows that Vanguard Target Retirement Fund investors are five times less likely to trade, even amid acute economic and market stress. This bodes well for participant outcomes because in times of volatility, the automatic rebalancing of Target Retirement Funds spares investors the emotionally challenging task of rebalancing on their own.
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