How participant actions can help or hinder their retirement savings
The behavior of defined contribution (DC) plan participants can have a big impact on savings growth and achieving retirement readiness. So how well are participants handling their accounts? We investigated the plan loan, hardship withdrawal, and contribution activity of our open-architecture DC plan participants to help answer this question—and to provide suggestions on how you can use behavioral data as part of your plan management strategy.
Part of our State of the participant 2023 series: insight and tools to help participants on their journey to retirement
Financial stress is a factor for many participants
How we behave tends to be driven by how we feel—and a good portion of retirement plan participants are feeling financially stressed. As of December 2022, about 4 in 10 participants described their financial situation as fair or poor, the highest percentage in four years.1
Percentage of workers who describe their financial situation as fair or poor
While everybody’s financial situation is unique, the economic environment could’ve stirred up some of this concern. Stock market volatility, inflation, and interest rates were all worrying factors. And the silver lining of the COVID pandemic period—the extra money many households had been able to stash away—was beginning to fray.
This situation led to a possible dilemma for workplace retirement savers. Would they dip into their account or cut back on contributions to relieve their current stress? Or would they try to keep their savings intact and working for them? Let’s just say this story has its heroes.
Did financial stress drive plan leakage?
One way to help answer this question is to look at DC plan loans and hardship withdrawals: On one hand, tapping into plan balances in these ways they can provide some financial aid for participants who may be facing pressing needs and have few other available resources. At the same time, however, they can derail months or years of retirement-savings progress.
About 6.1% of participants took a new loan2 in the course of the year
Our data shows little quarterly fluctuation in the percentage of participants who chose to borrow from their accounts (1–2%) over the course of our June 30, 2022–June 30, 2023, study period or in the average loan amounts ($9,669–$10,434).
Plan loans taken by quarter and year
A small fraction of participants took a hardship withdrawal in any given quarter and through the year
We extended our research into plan leakage by factoring in hardship withdrawals.
As the name implies, hardship withdrawals require evidence of a current and substantial financial need. These can range from a pending eviction or home foreclosure to things such as college expenses, medical bills, or a home purchase. Average amounts withdrawn ranged from $8,845 to $10,596, with a yearly average of $10,099.
Hardship withdrawals taken by quarter and year
A multi-year view hints at sound habits
To help put our quarterly analysis above in perspective, we broadened the lens to include plan loans and hardship withdrawals for the full 2021 and 2022 calendar years, as well as our own 12-month study period.
To be certain, COVID-related needs and SECURE Act provisions contributed to spikes in the number of participants accessing their plan balances in 2020, but current trends are quite encouraging.
Trends in the initiation of plan loans and hardship withdrawals taken by eligible participants
Plan loan and hardship withdrawal activity have remained within tight and modest ranges. And if you flip these numbers on their heads, the story is quite positive. Despite financial concerns, well over 90% of participants with access to their savings through these options have been able to avoid using them.
More participants increasing vs. decreasing contributions
Counts aren’t mutually exclusive. Participants may have performed multiple transactions across categories.
The short story here is that for every contribution decrease we processed during our study period, we handled nearly two contribution increases or new enrollments.
The average increase for established participants who raised their contribution was 3.2% of salary, the average initial deferral for new enrollees was 5.2%, and the average decrease was 6.1%.
Despite that positive news, seeing more than a third of participants decreasing their contribution reflects a degree of financial need.
Using data on participant behavior to help shape better outcomes
The calm or volatility of economic conditions inevitably affects the way participants are feeling about their own finances. This, in turn, may affect the actions they make about their plan. Financial professionals and other service providers have an opportunity to show their value, helping to improve the soundness of those decisions and the actions that participants take.
Tools for measurement
- Refer to your plan document to verify the availability of and rules for plan loans and withdrawals
- Review with your recordkeeper what aggregated loan, withdrawal, and contribution data is available through your plan sponsor/financial professional website or with the help of your customer service team
- Determine what reporting formats and timing work best for you, and make it a priority to get what you need
Tools for improvement
- Address the financial stress that may drive plan loans, withdrawals, and decreasing contribution rates by promoting the financial wellness program that may already be part of your retirement plan—or by introducing one
- Make sure your plan communications and education help participants prevent and address account actions that can derail retirement readiness—including information on emergency savings (an alternative to loans and withdrawals) and saving more
- Take advantage of the highly engaged state of new enrollees by following up early with messages on contributing enough and the importance of keeping your savings in the plan
Add participant behavioral data to your retirement readiness toolbox
Measures such as income replacement ratios and retirement expense projections can be helpful in monitoring your participants’ retirement readiness. Participant-level investment and account data can help you monitor how well they’re investing. By factoring in data on your participants’ loan, withdrawal, and contribution activity as well, you could gain valuable insight about their financial well-being and confidence about building for the future.
Most or all of this data should be available to you online or from your recordkeeper’s client services team. Ask about it today because the more you understand about where your participants stand, the closer you can get them to the retirement they deserve.
1 In December 2022, John Hancock commissioned our ninth annual stress, finances, and well-being survey with the respected research firm Edelman Public Relations Worldwide Canada (Edelman). An online survey of 3,825 workers was conducted between 11/29/22 and 12/14/22 to learn more about individual stress levels, their causes and effects, and strategies for relief. John Hancock and Edelman are not affiliated, and neither is responsible for the liabilities of the other. 2 The availability of loans and withdrawals, as well as the provisions for taking them, are discretionary for plan sponsors. The numbers in this viewpoint include only plans that allow these features.
All data is from our open-architecture platform. 2022 data reflects John Hancock Retirement Plan Services LLC's 1,756 plans, 1,440,374 participants, and $95,176,036,431 in assets under management and administration (AUMA) as of June 30, 2022. 2023 data reflects John Hancock Retirement Plan Services LLC's 1,966 plans, 1,511,835 participants, and $100,319,359,778 in AUMA as of June 30, 2023.
Important disclosures
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
This is intended for a Plan Sponsor audience.
MGTS-PS 507134-GE 11/23 507134 MGR1106233199876
