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How Retirement Readiness Fared in 2020; Ideas for Improving

Industry Trends and Research

Despite one of the most challenging periods in recent memory, a new study finds that DC plans continued to perform their critical role in preparing workers for retirement.  

Throughout 2020, the majority of the more than 1.1 million participants in over 1,000 John Hancock open architecture DC plans lost relatively little ground in their efforts to save for a secure retirement, the firm notes in the “State of the Participant 2021.”

According to the firm’s data, the percentage of participants achieving retirement readiness slipped very slightly from 49.6% on Sept. 30, 2019, to 47.9% on the same date in 2020. John Hancock defines retirement readiness at a plan level as the projected ability for participants to replace 70% or more of their workplace earnings in retirement. (The inputs for this calculation include current age, salary, account balance, participant contribution, enrollment in auto-escalation, employer matching and discretionary contributions, pension eligibility and projected Social Security benefits.)

“The data we observed into and through a challenging 2020 is actually quite encouraging,” notes Lynda Abend, chief data officer at John Hancock Retirement. “It reinforces the roles that participant engagement, plan design and the resilience of retirement savers play in keeping people on track toward a secure retirement.”

In addition to the state of retirement readiness, the study looks at trends in participant saving and investing, and tools and approaches that are helping participants reach their goals. Among the findings and observations from the 2021 study:

Retirement readiness: Despite the slight dip in retirement readiness among the overall sample, most participants below age 50, along with those earning between $50,000 and $150,000 per year, remain on track for a secure retirement. Participants aged between 30 and 39 were the most retirement-ready at 64%, followed by those younger than 30 at 58%, and participants aged 40–49 at 52%.

Average account balances tracked the market: When global equity markets fell suddenly last spring, only a very small percentage of participants moved money to non-equity investments. This allowed the larger population to avoid locking in losses when the market dipped in early spring. It also allowed account balances to return to near—or in the case of those up to age 39, above—their Feb. 28 level. Accounts held by those under age 30 enjoyed the best average return over this stretch, at 5.1%. By contrast, account balances for those 60 and older decreased by 2.6% on average. 

“The big takeaway here is that the bear market of last winter was short-lived. Buoyed by a commitment to stay on strategy and some cooperation from the markets, participants reached the end of September in good shape and trending in the right direction,” the study observes.  

CARES Impact: While Coronavirus-related distributions under the CARES Act served as a financial lifeline for 3.4% of John Hancock’s participant base —with an average distribution of $20,768—the firm’s data analytics team calculated that these withdrawals, if not replaced in participants’ accounts, could reduce the plan savings they bring into retirement by as much as 10–13%.

Interest in personalized, expense-based planning: Despite (or perhaps because of) the pandemic, the firm found that people were motivated by the personalized projections. The firm launched an interactive planning tool for the plan participants they service, where 7 out of every 10 participants who sampled the tool proceeded to complete a personalized retirement expense projection. More than 20% of these DC plan savers increased their plan contribution rate on the spot, at rates that averaged from 4% to 5.2%, depending on age, the study notes. It also found that participants in mid-career—the building and multi-goal years—showed the strongest interest in this personalized, on-demand approach to retirement planning. 

Auto features: Plans that combined automatic enrollment and automatic increases enjoyed an eight percentage-point advantage (19% in actual terms) in retirement readiness over plans with no auto features at all. The firm also found once again in 2020 that plans with lower default contribution rates generally have higher opt-out rates. “So, if you really want to help boost retirement readiness, consider setting the right tone by setting a higher default rate. Year after year, our data shows that higher default rates don’t scare people away,” the study advises. 

TDF-plus strategies: Based on a subsequent analysis of the status of all TDF investors, John Hancock found that participants who have been blending TDFs and other types of funds are on track to replace more of their preretirement income (89.6%) than those holding TDFs only (84.8%). In addition, a larger portion of TDF-plus investors is retirement ready. 

The study emphasizes that it is not intending to recommend randomly combining other types of funds with TDFs—noting that as Morningstar points out, TDFs are intended to be held on their own—but adds that the evidence seems to show that participants can potentially have success with a “TDF-plus” approach to asset allocation.

Data from the study was derived from John Hancock’s open-architecture platform, which included 1.1 million participants, 1,076 plans, and $76.6 billion in assets under management as of Sept. 30, 2020.  

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