2020’s lessons for 401(k) participants and financial professionals

It’s all too fresh to require a detailed summary—the ballooning pandemic, the volatility in financial markets, and the devastation to segments of the economy, many businesses, and millions of Americans. The pandemic hit the world hard, but it also hit unevenly. Parts of the population who kept their jobs and were able to work from home have been far less affected than those who lost their jobs, work on the frontlines and risk their health daily, became sick, or had a loved one suffer from the virus itself.

Because we’re in the business of helping people save for retirement, it’s important for us to understand the impact of the pandemic and its side effects on our participants and their account balances. So, in our 2020 financial stress survey, we asked people how they were feeling—and learned that the 39% who said they were financially stressed before the pandemic grew to 62% during the pandemic.¹

During financial hardship, people often lower their contributions or look to their retirement plan to provide a cushion during financial hardship—and the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded access to that cushion. And during volatility, investors get nervous and can be tempted to move their money. Although we certainly see that many people did take action within their retirement plans in 2020, the impact wasn’t as bad as some had expected.

In a normal year, very few people lower their deferrals, although there’s often a slight uptick in activity in December and January. After the virus turned into a pandemic and the market reacted with volatility in February 2020, we saw an increase in people lowering their retirement plan contributions, although still not in large numbers. After spiking in March, that activity came down gradually, settling into a more normal frequency and pattern from June through December, with 2.6% of participants lowering their deferrals in December of both 2019 and 2020.

Market volatility and changes in retirement plan legislation usually drive additional call volume, and this year was no different. Our volumes went up after the market swings in February, then settled a bit. Then the CARES Act provisions went into effect and drove additional calls, spiking at 15% of total calls, then coming down to 10% at the end of the year. Although people called to ask about loans and required minimum distributions (RMDs), the majority of the calls, by far, was about coronavirus-related distributions (CRDs). 

The CARES Act made retirement plan savings available to some participants who could show a need, by giving plan sponsors the options to raise the maximum loan amount and/or to offer CRDs. Once CRDs became available, the number of loans went down, but the average loan amount went up. The average loan amount taken from April through December 2020 was $11,888, which was 21% higher than the average taken from April through December 2019.

To benchmark CRDs with normal withdrawal activity, we track CRDs with in-service withdrawals. Although a small percentage of our participants took CRDs, they became the #1 type of withdrawal during the CARES Act eligibility period. 

The volume of CRDs taken was fairly steady from May through November, with a spike in December before the clock ran out on them. The average amount taken was highest in the early months of the pandemic, ranging from $26,319 in April to $16,121 in December. 

The stock market started wobbling in February, then took a serious tumble in March. And although the pandemic and economic uncertainty that caused the volatility continue, markets recovered by the end of the year. As a result, March saw more participants make changes to their 401(k) investments than any other month—but even then, only 0.7% of participants made any moves. 

Interestingly, in March, about the same number of participants moved money into stable value and fixed income as out of it—some looking for safety, others looking to take advantage of a down market. For the rest of the year, the move into or out of safety didn’t seem to be tied to market activity—with no real correlation observed. By the end of 2020, only 5% more participants had moved into stable value/fixed income than out of those instruments.

The good news to draw from these trends is that very few participants made any investment moves at all. The ongoing investment education that we provide participants, including guidance for weathering market volatility, seems to have worked. 

Although the CARES Act’s loans and withdrawals are no longer available and—for now—market volatility has settled down, that doesn’t mean participants no longer need guidance on the topics.

CRD guidance—People who took CRDs need to know what their options are for paying them back or not paying them back. And they need to understand the tax implications and impact on their retirement saving of whichever option they choose. 

Investment education—With market volatility fresh on people’s minds, it’s a good time to reinforce investment basics (e.g., asset allocation, diversification, and the different types of investments available in a 401(k). It’s also a good time for a refresher on weathering future volatility with recent statistics to support the approach.

Personal finance tips—Whether your participants have experienced financial hardship themselves, the current economy is a good backdrop to reinforce the importance of prudent financial practices—such as budgeting and having an emergency savings account.

The past year has given retirement plan sponsors, financial professionals, and recordkeepers plenty of reasons to reach out to participants. Although we’re in a new year, there’s still ample opportunity to use the lessons of 2020 to help participants manage their retirement savings and their overall financial wellness. 

1 John Hancock’s seventh annual financial stress survey, John Hancock, Greenwald & Associates, July 2020. This information is general in nature and is not intended to constitute legal or investment advice. Greenwald & Associates and John Hancock are not affiliated, and neither is responsible for the liabilities of the other. This report presents the results of research conducted by Greenwald & Associates on behalf of John Hancock. The objectives of this study were to (1) quantify the financial situation and level of financial stress of John Hancock plan participants; (2) determine the key triggers of financial stress; (3) understand the extent to which actions, including actual financial behavior and planning activity, ameliorate stress; and (4) assess retirement preparation and readiness. This was an online survey of 589 John Hancock plan participants. The survey was conducted from 7/28/20 through 8/14/20, with an average survey length of approximately 19 minutes per respondent. Respondents were located from a list of eligible plan participants provided by John Hancock. All statistical testing is done at 0.95 and 0.99 significance levels. The maximum margin of sampling error at the 95% confidence level is ±4.1%. 2 The Dow Jones Industrial Average is a stock market index that tracks 30 large, publicly owned blue chip companies trading on the New York Stock Exchange and the NASDAQ. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.