Thanks to the Pension Protection Act and its resulting innovations, most retirement plan participants are more likely to be on track to a secure retirement, according to a new white paper.
This is especially true for those participants under age 50, according to John Hancock’s “State of the Participant 2020,” which looks inside the status and success of the people who participate in the firm’s DC retirement plans.
As beneficiaries of auto-enrollment and auto-escalation, younger generations were found to be more likely to be on track compared with their older counterparts.
According to John Hancock’s data, the percentage of retirement-ready participants declines with age:
- Under age 30 (60.4%)
- Age 30-39 (65.9%)
- Age 40-49 (53.3%)
- Age 50-59 (34.2%)
- Age 60 and older (20.4%)
For benchmarking purposes, the firm defines retirement readiness as the expected ability for a participant’s projected assets at normal Social Security age to replace at least 70% of their preretirement earnings.
Auto-Features: Getting the Job Done
In what may come as no surprise, automatic enrollment and automatic increases can make a profound difference in supporting retirement readiness, the study notes. Adding auto-enrollment with a 6% default rate and auto-increase at 1% can make 36% more participants retirement ready. The findings below display the impact of auto solutions on participants’ retirement readiness:
- No auto features (47.9%)
- With auto-enroll at 4% (56.2%)
- With auto-enroll at 4% plus auto increase at 1% of year (57.3%)
- With auto-enroll at 6% (60.2%)
- With auto-enroll at 6% plus auto increase at 1% of year (63.0%)
Participants also appear to be green-lighting higher default contribution rates, according to the paper. “Logically, you’d think that the higher the default rate, the more likely eligible employees would opt out of enrolling. That’s simply not the case,” the paper states. In fact, 9 out of 10 plans with auto-enroll use default contribution rates between 3% and 6%, but the findings show relatively small difference between opt-out rates within this range.
- 3% (12.0%)
- 4% (9.4%)
- 5% (10.1%)
- 6% (10.4%)
- 7% (4.6%)
- 8% (7.9%)
What’s more, the paper emphasizes that while the 3% default contribution rate is still the most popular among plans with auto-enrollment, the shift toward higher default rates (between 4% and 6%) has been significant over the past four years:
- 3% default rate (51% in 2015 dropping to 39% in 2019)
- 4-5% default rate (25% in 2015 inching up to 26% in 2019)
- 6% default rate (16% in 2015 increasing to 25% in 2019)
Too Conservative or Too Aggressive?
As to self-directed investors, many could use a nudge, according to John Hancock. With many younger participants tending to be “market shy,” the percentage who are overly conservative starts relatively high, but then “relative aggressiveness increases with age,” as older participants play catch-up by relying on equity investments, the paper explains. According to the findings:
- 72% of those under age 30 are invested too conservatively;
- 53% of those ages 40-49 are invested too conservatively; and
- for those age 60 and older, 45% are invested too conservatively, while 43% are invested too aggressively.
“Taken together, these numbers indicate that all populations could use some help maintaining the right balance, whether it’s through education, direct advice or an introduction to managed accounts or TDF investing,” the paper states.
As for tips to improve overall retirement readiness, the paper recommends:
- viewing every aspect of DC plan strategy and design as a “potential chance” to improve retirement readiness;
- using smart plan design to help optimize other disciplines;
- paying close attention to emerging rules and fiduciary requirements; and
- keeping an eye out for administrative efficiencies, such as lower expenses and more timely contributions.
Findings in the study are based on the firm’s open-architecture platform of 1.2 million participants from 1,123 plans as of Sept. 30, 2019.
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