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Two steps forward…
And two steps back, or so the saying goes. That is certainly true of a system that is impacted by the ups and downs of the economy and the whiplash of a changing regulatory environment. This year’s recently released 66th Annual Survey shows both the steps forward and back that retirement plans took in 2022. Plan contributions dipped across the board after reaching record levels the year before. Yet, plan sponsors moved forward with implementing best-practice plan designs and offering choice to participants.
Contributions
Nearly 90 percent of eligible employees had 401(k) accounts and 85.6 percent made contributions to them in 2022 (down from 89.2 percent the year before). The combined employer and employee contribution rate was 12.1 percent (down from 15.3 percent in 2021). Though the average employer contribution slipped to below five percent of pay, most companies continued to make contributions (96.2 percent made planned matching contributions).
Plan Designs
Roth after-tax contributions are now available in 90 percent of plans. Though only 12.4 percent of plans will be allowing Roth treatment of employer contributions as allowed under SECURE 2.0, 40 percent are still considering it, and nearly 60 percent currently allow in-plan Roth conversions.
Automatic enrolment availability increased in 2022 and is now used in 64 percent of plans. The use of automatically reenrolling nonparticipants annually has increased over the last 10 years and is a trend to watch as we continue to see use of that feature expand.
There was an increase in plans using a safe harbor plan design in this year’s survey – half of plans did so versus 45 percent the year before. And, more plans used an enhanced matching formula (one that exceeds the traditional safe harbor formula) – 31 percent of safe harbor plans.
Investments
More plan sponsors are using an independent investment advisor to help with fiduciary responsibility – 83 percent of plans, up from 76.8 percent in 2021. More are also using an OCIO (outsourced chief investment officer) – 14.7 percent versus 11.7 percent the year before.
Unsurprisingly, there was an increase in availability of target-date funds – 85.1 percent of plans offer them. There was also a slight uptick in the availability of investment types we have been talking about for a few years now:
- Retirement income – Ten percent of plans offer an in-plan annuity, up from 8.1 in 2021, including 10.8 percent of large plans, up from 6.7 percent in 2021.
- ESG – though only a small percentage of plans offer a standalone ESG fund, more did in 2022 than in 2021 – 6.4 percent, up from 4.2 percent.
- Managed accounts – large plans (5,000+ employees) seem to be adding professionally managed accounts as an option for participants – 64.1 percent versus 56.7 in 2021.
Though the percentage of plan offering investment advice to participants stayed about the same, there was a slight increase in plans offering robo-advice – 15 percent up from 13 percent the year before.
Education
Though we did not see an increase in plans offering a comprehensive financial wellness program to employees, we saw an increase in employers focusing on financial literacy. Financial literacy was cited as the primary focus of plan education for the second year in a row, indicated by 83 percent of organizations and up from 77 percent in 2021. Additionally, more plan sponsors are providing a suggested savings rate (32.4 percent, up from 29.9 percent)
Distributions
Though we are currently hearing about an increase in hardship withdrawals, in 2022 the use of hardships dropped (from 1.9 percent in 2021 to 1.5 percent). The percentage of participants taking plan loans remained about the same in 2022 as the year before. Most plans continue to offer loans, but there was a shift in the formula used to calculate loan interest rates – the most common formula remains Prime+1% but that dropped from 61 percent of plans to 54.6 percent with more plans charging the Prime rate.
About a third of plans allow participants to repay loans after separation, but that is size correlated with 63.2 percent of large plans doing so versus 12 percent of small plans.
2022 Change
The data in this year’s survey showed a series of small changes – some forward and some back – as companies continue to create designs to support their employees and plans, while juggling economic constraints and regulatory changes. Last year we stated that the strength of the system going into 2022, with record levels of contributions and adoption of participant support designs would help buffer retirement savings against any economic downturn – for now that seems to be the case.