Market Moved Participants—but Not Far

The recent market tumult certainly took a toll on participant balances, but a an analysis by The Principal suggests that it might have been less than some feared.

In “The Total View 2009,” a report about The Principal’s retirement plan business, the firm noted that while 7.7% of participants stopped contributing to their retirement savings, and 8.8% decreased the amount, nearly one-in-five (19.2%) actually increased their contributions.  Additionally, Principal noted in the report that the percentage of participants taking plan loans decreased slightly, from 6.4% in 2007 to 6.0% last year. 

Not surprisingly, Principal noted that they saw call center volume at record highs in the fall of 2008, as participants wanted answers and assistance about reacting to the market situation.  According to the report, the main topics of calls during the economic crisis were:

  • distribution information (withdrawals, loans, hardships)
  • investment options and asset allocation
  • stability of the money with organizations that are failing.

The average personalized rate of return among participants in defined contribution (DC) plans recordkept by The Principal experienced a dramatic decline from 2007 to 2008—a shift of more than 30 percentage points, compared to the Standard & Poor’s (S&P) 500 Index decline of more than 40 percentage points.

Stable Shifts

As expected, there was also a more significant increase in plan assets held in the stable category among those participants closer to retirement: an 8.1 percentage point increase for people ages 50 to 64 and an 11 percentage point increase for ages 65 and older in this category.  However, the report’s authors noted that “those same participants held steady with their exposure to domestic stock investment options,” noting that for participants ages 50 to 65 there was only a 3.1 percentage point increase; and an increase of only 0.3 percentage points for participants ages 65 and older in this category in 2008.

Lifecycle Changes

Principal also noted an increase in the availability and utilization of lifecycle or target-date funds.  From 2007 to 2008 alone, the number of plans offering a lifecycle investment option increased by more than 6%, a trend that the report's authors said "reflects the favorable treatment of these investment options by the PPA [Pension Protection Act].” The authors also said that “in reviewing participant adoption of lifecycle investment options, we continue to find the most significant adoption is among those participants who have a longer retirement time horizon and lower average account balances, particularly those with less than a $25,000 account balance.”

Plan Design Changes

Principal said that as of June 1, 2009, 4.9% of retirement plans with services provided by The Principal have made a change to their matching contribution formula since the beginning of 2009, nearly equal to the 4.7% that did so during all of 2008. “We believe this is a direct reflection of the economy taking a downturn and of plan sponsors not having the funds to put into the plan,” according to the report. Principal noted that many plans are moving from a stated match to a discretionary match, while others are adding maximums to the amount they will match or decreasing the minimum amount matched for the year.

Principal said that a small number of safe-harbor plans are removing their match and the Internal Revenue Service (IRS) has recently proposed regulations to be able to stop a qualified non-elective contribution (QNEC) mid-year, but only if the employer incurred a substantial business hardship. Removing the provisions needed to be a safe-harbor plan is “a large tradeoff for plan sponsors as they are giving up the ability for their highly compensated employees to contribute up to the legal deferral limit without year-end refunds,” Principal noted.

Other Trends

Among employee stock ownership plans (ESOP) with services provided by The Principal, the benefit level received by ESOP participants went down from 19.4% in 2007 to 15.7% in 2008. However, the average stock value changed from 2007 to 2008 for privately held ESOP clients, increasing 0.8%.

Among non-profit organizations that sponsor retirement plans with services provided by The Principal, the participation rate held relatively consistent from 2007 (64.6%) to 2008 (64.9%), which is comparable to the overall participation rate which includes for-profit and non-profit organizations at 66.1%. In 2008, non-profit plan participants decreased their overall level of deferral rate at a level that is consistent with those that are part of a corporate defined contribution (DC) plan, according to the report.

The Total View 2009 includes benchmarks for an in-depth look at retirement program trends among almost 44,000 retirement plans in 2007 and more than 43,000 plans in 2008 with services provided by The Principal to approximately 4.5 million (2007) and 4.7 million participants (2008) across four core retirement plan designs: defined contribution, including 401(k) and 403(b), defined benefit, nonqualified and employee stock ownership plans (ESOP), in addition to third-party research.

The report is available at