403(b) plan participation rates increased during the Covid-19 pandemic. However, participant savings rates and employer contributions declined. Those are the headlines from the Plan Sponsor Council of America’s (PSCA) latest annual 403(b) plan survey.
Non-profit participation in 403(b) plans reached its highest level since PSCA began tracking it in 2008. 403(b) plan participation rose to 77.2% in 2020, up from 76.6% in 2019, and 72% in 2018. However, employer contribution rates fell over the same period. This occurred as many small companies attempted to stem the tide of financial damages resulting from the pandemic.
Employers contributed an average of 4.6% of workers’ pay to individual 403(b) accounts in 2020, a decline from 6.3% in 2019 and 5.5% in 2018. Around 12.5% of almost 400 plan sponsors surveyed reported that they suspended or reduced their contributions in 2020. This, according to the PSCA study, sponsored by Principal Financial Group. Among those that paused or lowered contributions, 19.1% were small businesses with fewer than 49 employees. Workers’ savings rates also fell, dropping to an average of 6.2% from a high of 7.2% and 6.6% in 2018.
A bright spot is that auto enrollment is on the rise in 403(b) plans. This is likely a contributing to factor to the increasing 403(b) plan participation rates. Nearly 30% of organizations reported that they use the auto enrollment the feature – a 50% increase from five years ago. And more than half (56.3%) use the auto escalation feature to increase their default employee contribution rates over time. In addition, half (49.5%) of 403(b) plans now offer Roth after-tax contributions, up from 46.8% in 2019. Investment advice for participants is also more widely available. Investment advice usage increased to 41.6% of plans in 2020 from 36.7% the previous year. In addition, growing numbers of plan sponsors are monitoring investment performance more frequently. During 2020, 40.3% said they monitored quarterly vs. 38.5% in 2019.
Employee loans and hardship withdrawals increased during the pandemic. The CARES Act loosened restrictions on retirement plan withdrawals, and it seems 403(b) participants used that to their benefit. In 2020, on average, 13.6% of participants had a loan outstanding, up from 11.8% in 2019. An average of 1.3% of participants took hardship withdrawals, an increase from 0.8% the year before. The loans were also larger, nearly doubling to $16,195 from $9,483 the previous year.
The pandemic underscored the financial fragility of American workers across the board, and 403(b) participants appear to be no different. If anything, they may be more vulnerable given that many work for small organizations that also felt financial pressure due to the pandemic and the resulting economic downturn. As evidenced by the rise in 403(b) plan participation rates, workers seemed to recognize the importance of participating in a 403(b) plan. However, they also didn’t think twice about dialing back the saving rate, to sustain them through a financially difficult time.
It remains to be seen whether this is a phenomenon that persists in the coming months, or if savings rates increase while withdrawals decline. 403(b) plan sponsors should restore employer contributions if and when they can to help entice employees to increase their individual deferrals. There is still a need to educate employees on the benefits of leaving their retirement savings in the plan for the long term. That is certainly preferable to tapping plan assets early to cover short-term financial needs.
