In 2015, some encouraging trends emerged for defined contribution plans, according to a recent survey. New participant savings rates, increased Roth contributions, reduced trading activity and fewer plan loans all contributed to solid retirement preparation efforts for America’s workers.
Account Balances Grow
Among participants enrolled for at least one year, average DC plan account balances increased from $103,873 at the end of 2014 to $108,383 at year-end 2015. When longer-term participants—those with two or more years of participation—were considered, average plan balances grew more than 10% annually, from $113,732 on December 31, 2013, to $139,819 on December 31, 2015.
Although the survey showed average plan balances dropped more than $6,000 to $94,090 from year-end 2014 to December 31, 2015, the decrease can be chalked up to large numbers of new entrants to DC plans, a positive trend.
Rising Roth Contributions
Increasingly, workers are using a mix of pre-tax, after-tax and Roth contributions, and in combination, their average savings rate is 10.5%. When available, 12% save on a Roth basis. In fact, while average contributions ticked up only 0.1% from 7.6% to 7.7% in 2015, much of that increase is attributable to Roth savings. That’s a good sign, because withdrawals from Roth accounts generally aren’t taxed, so that infinitesimal hike today could mean thousands of retirement income dollars down the road.
Sparse Trading Activity
Despite stock market volatility and rising contribution rates, 2015 was among the lightest trading years on record. After accounting for those who are fully invested in target date funds (because they don’t require rebalancing), only 20% of participants made a trade in their accounts last year.
Fewer Loans Lightens the Load
The number of participants initiating new plan loans has declined in recent years. In 2015, 11% initiated a new loan, down from 12% in 2014 and 14% in 2010. Just 25% of participants had a loan outstanding against their account—the lowest since 2008.
As the sting of the financial crisis fades and workers venture back into the market, Aon Hewitt’s findings are encouraging news. Fewer loans, growing plan balances and steady participation seem to show that retirement preparedness is becoming a priority for many, and an increasing sense of financial well-being may be driving improvements in key DC plan metrics.
The Aon Hewitt survey, the 2016 Universe Benchmark Report, covers data gathered from more than 125 DC plans representing roughly 3.5 million eligible participants.
The report may be viewed at http://tinyurl.com/AonHewittUBStudy.
Remember that investing in mutual funds and other investment products involves risk, including the possible loss of principal invested.