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Auto Features Push Plan Participation, Contribution Rates to Highest in a Decade

Practice Management
Capped by a strong 2019, the 2010s by many measures was the decade of the defined contribution investor, according to Alight’s 2020 Universe Benchmarks report

Thanks in large part to employers adopting automatic features, there were more workers participating in plans, the average savings rate was up, more portfolios were diversified and loan use was lower compared to the beginning of the decade, according to the firm’s annual report, which shows how the DC world has changed over the past decade.  
Automatic enrollment continued to drive higher plan participation over the past several years as plans with automatic enrollment have an average participation rate of 87%. Overall, the average plan participation rate at year-end 2019 was 81%, the highest seen over the course of the decade. 
What’s more, the average contribution rate increased to 8.1%, also a decade high, with automatic escalation helping to fuel this increase, Alight notes. In addition, four out of every five participants are saving enough for the full employer match. 
The 2020 version of Alight’s report is based on 116 plans with more than 3 million eligible participants. It covers participation rates, savings rates, plan balances, investment and trading activity, and distributions from accounts based on year-end 2019 data. 
The average plan balance was at an all-time high of $122,150 at year-end 2109, while at the beginning of the decade, the average balance was $70,970. Moreover, the median return for investors during 2019 was 22.4%, the highest of any year in the decade, capping off a bull market decade as the median annualized 10-year return from 2010-2019 was 8.9%.
COVID-19 Impact
Given the developments over the past few weeks with the COVID-19 pandemic, Alight recognizes that the data in the report may seem outdated and “paint a picture of a time when Wall Street was rolling,” but the firm believes it’s important to share this data because it helps set a “bright line” to know when the country has overcome the market correction of 2020. 
Not surprisingly, looking at first quarter data for 2020 reveals that things have changed quite a bit since the start of the year. Here, Alight’s data shows that the average plan balance for the first quarter of 2020 decreased by 17%, while the median rate of return for participants was -20%.
Encouragingly, 18% of participants increased their contribution rates (often by auto-escalation), while only 8% decreased their rates, including 2% who stopped contributing. 
Only 2.4% of participants took a loan during the quarter, which was on par with a typical quarter. In addition, 2.8% of participants took a withdrawal, which is about twice of what the firm would see in a typical quarter (6% in all of 2019). Alight notes, however, that none of the CARES Act provisions were part of plans in the first quarter.    
Trading Activity
The survey found that 14% of participants traded during the first quarter of 2020, and three-quarters of people who traded in the first quarter made only one trade. For comparison purposes, 21% of participants traded in all of 2019.
And in what may be a sign of things calming down and returning to normal, May was the lightest month of trading activity for 401(k) investors in 2020, according to the firm’s 401(k) Index. On average, the Alight Solutions 401(k) Index shows that 0.018% of balances were traded daily—down from 0.023% in April and 0.078% in March. 

The total transfers as a percentage of starting balance were only 0.11% for May, compared to 1.72% for 2020 year-to-date. Fixed income was still leading in terms of transfers, with 13 of 20 days in May favoring fixed income funds. The year-to-date data show 65 of out 103 days favoring fixed income. 
In addition, the month of May had no above-normal days of trading activity. By comparison, the first quarter of 2020 had 32 days of above-normal days of trading activity. 
Additionally, all of the benchmarks followed by Alight had positive returns for May. The firm notes that small U.S. equity (represented by the Russell 2000 Index) rose 6.5%, large U.S. equity (represented by the S&P 500 Index) gained 4.8%, international equity (represented by the MSCI All Country World ex-U.S. Index) was up 3.3%, and U.S. bonds (represented by the Bloomberg Barclays U.S. Aggregate Index) rose 0.5%.
Target Date Funds
An interesting observation from Alight’s Universe Benchmarks report is that TDFs remain popular, with 76% of investors using them, but nearly half of TDF investors are not using them as designed. The findings show that 45% of TDF investors supplement them with other core funds and 10% of target date investors use more than one vintage. 
Alight submits that the high rate of partial TDF usage suggests that many investors either do not understand the product or that they are seeking additional personalization in their investment portfolio.