Investment Company Institute Issues Report Entitled 'Defined Contribution Plan Participants' Activities, 2020'

WASHINGTON, Feb. 26 -- The Investment Company Institute has issued a 20-page report dated February 2021 entitled: "Defined Contribution Plan Participants' Activities, 2020".

The report was prepared by Sarah Holden, senior director of retirement and investor research; Daniel Schrass, economist; and Elena Barone Chism, associate general counsel for retirement policy.

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Contents

1 Key Findings

2 Introduction

5 DC Plan Participants' Activities in 2020

12 Notes

14 References

Figures

3 FIGURE 1

28 Percent of US Retirement Assets Were Defined Contribution Plan Assets in Third Quarter 2020

4 FIGURE 2

Equity Returns

6 FIGURE 3

Defined Contribution Plan Participants' Activities

10 FIGURE 4

401(k) Loan Activity

11 FIGURE 5

401(k) Loan Activity Typically Varies over the Course of a Year

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Key Findings

* In 2020, stock values increased on net, as the market recovered from the impact of the global COVID-19 pandemic on the United States in March. After falling about 20 percent in the first quarter of 2020, the S&P 500 total return index rose again, ending the year up 18.4 percent from year-end 2019.

* Defined contribution (DC) plan withdrawal activity in 2020 remained low, in line with the activity observed in recent years. In 2020, 3.8 percent of DC plan participants took withdrawals, compared with 3.9 percent in 2019 and 3.1 percent in 2009 (another time of financial market stress). Levels of hardship withdrawal activity also remained low. Only 1.4 percent of DC plan participants took hardship withdrawals during 2020, compared with 1.9 percent in 2019 and 1.6 percent in 2009. Hardship withdrawal activity since 2019 may reflect increasing awareness of expanded hardship withdrawal availability from the Bipartisan Budget Act of 2018 and the onset of financial stresses relating to the COVID-19 pandemic.

* In addition, the recordkeepers surveyed identified 5.8 percent of DC plan participants as taking coronavirus-related distributions (CRDs) during 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, 2020, provides penalty relief and increased flexibility in retirement plan withdrawals for individuals affected by COVID-19.

* Preliminary data indicate that the commitment to contribution activity in 2020 continued at the high rate observed in other years. A preliminary estimate indicates that only 2.3 percent of DC plan participants stopped contributing in 2020, compared with 2.3 percent in 2019 and 3.4 percent in 2009.

* Most DC plan participants stayed the course with their asset allocations despite high stock market volatility in the first quarter of 2020. In 2020, 10.6 percent of DC plan participants changed the asset allocation of their account balances, slightly higher than 8.3 percent in 2019 but lower than 11.8 percent in 2009 as the stock market started to recover from the global financial crisis. In 2020, 6.3 percent changed the asset allocation of their contributions, slightly higher than 4.4 percent in 2019 but lower than 10.5 percent in 2009.

* DC plan participants' loan activity edged down in 2020, perhaps partly reflecting the use of CRDs instead of loans. At the end of December 2020, 14.8 percent of DC plan participants had loans outstanding, compared with 16.1 percent at year-end 2019, and 16.7 percent at year-end 2018. CRDs, like loans, can be repaid into a retirement account; however, unlike loans, they may have current tax implications.

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Introduction

Defined contribution (DC) plan assets are a significant component of Americans' retirement assets, representing more than one-quarter of the total retirement market (Figure 1) and about one-tenth of US households' aggregate financial assets at the end of the third quarter of 2020./1

To measure participant-directed changes in DC plans, ICI has been tracking participant activity through recordkeeper surveys since 2008. This report updates results from ICI's survey of a cross-section of recordkeeping firms representing a broad range of DC plans and covering more than 30 million employer-based DC retirement plan participant accounts as of December 2020. The broad scope of the recordkeeper survey provides valuable insights about recent withdrawal, contribution, asset allocation, and loan decisions of participants in these plans.

The most recent survey covered DC plan participants' activities in 2020. In this period, stock prices declined sharply before recovering (Figure 1); on net, the S&P 500 total return index increased 18.4 percent in 2020 (Figure 2). In addition, close to the end of the first quarter, US policymakers acted to provide relief to individuals affected by the global pandemic. Specifically, for individuals affected by COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, temporarily eliminated the 10 percent penalty on early withdrawals from retirement accounts; the act also contained optional provisions increasing repayment flexibility and expanding access to DC plan account balances for in-service withdrawals and loans./2

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Footnotes:

1/ Total financial assets of US households were $98.7 trillion at the end of 2020:Q3. See US Federal Reserve Board 2020. For total retirement market data, see Investment Company Institute 2020.

2/ For a summary of CARES Act changes related to DC plan distributions and loans, see Internal Revenue Service 2020b

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The full report can be viewed at: https://www.ici.org/pdf/20_rpt_recsurveyq4.pdf

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