The Financial Wellness Scorecard, which Bank of America Merrill Lynch has been producing since the first quarter of 2009, did not have any surprises, according to Kevin Crain, head of institutional retirement and benefits services. But the positive behaviors, such as keeping money in retirement plans and actively participating, are on a much more encouraging trend, he said.
The report details participant behavior in 401(k) plans and sponsor adoption of new plan design features and services in the firm’s 401(k) business, which has $98 billion in total client plan assets. It seeks to identify trends and suggest ways to help employers drive better outcomes in 401(k) plans.
“There are two big things from the results in 401(k) plan effectiveness and the ability to make participants more financially well,” Crain told PLANADVISER. “First, the ratio that measures positive behaviors was as high as we’ve ever seen. Savings behaviors have improved dramatically, and people are taking more positive actions, such as saving, than negative ones, such as taking withdrawals from their retirement plans. Loans and withdrawals are beginning to decrease year over year.”
A number of factors could be the reason for the change, Crain said. “No doubt the economy plays into this. In early 2009 the economy was at a very low point, and the positive versus negative behaviors were split almost evenly at 50-50.” Over the past few years, the positive financial actions have been outweighing the negative ones, with 2012 probably representing the strongest economic year to date, according to Crain.
But, said Crain, “you still have to have very strong actions from the plan sponsor and provider to give participants a very easy way to stay engaged in the plan, because they don’t do a lot on their own.”
Plan Design Drives Results
The second driver of results is plan design. It’s not just there are more retirement plans in use today. “More telling is what plans are doing more aggressively with features such as auto enrollment,” Crain said. More plans are adding this feature, and using it more aggressively—not just for new hires, and also in combination with an auto increase rate. Now, he said, many more plans have increased the auto deferral rate to well beyond 3%.
Crain said Bank of America has been seeing far more aggressive coupling with plans that used auto enroll and are now adding auto increase alongside, which provides a fully automated solution to get participants very engaged in the savings and in the plan. “When they do that, they look to go 8% or 9% or 10% deferral rate, which is aggressive,” he said. “If you auto enroll plus do an auto increase and get someone up to 12% and do a normal match, then you’re actually getting a person to have contributions of 13% in a plan.”
The third area is financial education, which up until the mid 2000s, used to be around enrollment, Crain noted. “Financial education has evolved to working on broader programs,” he said. “It’s more in totality for the person: how do you think about saving, about investing, about managing your expenses? Education is a benefit plan sponsors can offer the employee.”
Education also speaks to the ability to have more advanced discussions with employees, due in part to the auto solutions, which helps to increase participation. The enrollment and the engagement work hand in hand, and engagement levels have shown a big uptick.
“Participants are more interested in being educated that way, and plan sponsors are more interested in offering this,” Crain said. “It’s more holistic for the employee, because it means more in the totality of their lives. If you can get face to face, it’s extremely impactful. It’s not scalable but it’s very impactful. I would never dismiss financial education in the face of auto features. When people are automated in the plan, and the education is more advanced toward how should you invest, people are far more receptive to be educated because their level of engagement is greater.”
Crain said he thinks financial education will have an even bigger impact on participants’ lives. “It will help them be more financially well and stay well for longer even if they leave the company.”
Key findings from the report are:
- Among employees who took an action in their 401(k) plan during the fourth quarter last year, 81% took a positive action, such as starting or increasing contributions—compared to 19% who took a negative action, such as stopping or decreasing contributions. This ratio, which is measured quarterly and in this case occurred amidst a presidential election and fiscal cliff uncertainty, represents a two-year high.
- New 401(k) loan issuance transactions were also down approximately 5% year-over-year, and total 401(k) hardship and in-service withdrawals were down nearly 8% year-over-year.
- As of the end of last year, more than 90% of 401(k) participants who were automatically enrolled were still actively contributing to their plans.
Last year, employers sought ways to help their employees achieve retirement goals, including:
- As of January 2013, more than half (52%) of plan sponsors who use automatic enrollment are now also using automatic increase in their 401(k) plans. Overall there was a 17% year-over-year increase in plan sponsor use of auto increase.
- Among 401(k) plans that use automatic enrollment, there was a 60% increase in the number of plans using a default contribution rate of 6% or greater.
- Tens of thousands of employees attended seminars or face-to-face meetings with a Bank of America Merrill Lynch financial professional last year at their place of work. The report also showed that employers who offered in-person meetings with a financial professional were up to two-thirds (67%) more likely to increase enrollment or contributions in their company’s plan.
- In 2012, 30% more employers requested that meetings and seminars be held with their employees, and 22% more employees took advantage of such financial education services.
The Bank of America Merrill Lynch 401(k) Wellness Scorecard can be accessed here.