Employee participation in nonprofit 403(b) retirement plans inched upward during the COVID-19 pandemic, reaching its highest level since tracking began in 2008, due in part to automatic enrollment, which has increased 50% during the past five years.
Overall retirement plan participation rose to 77.2% in 2020, up from 76.6% in 2019 and 72% in 2018.
The annual 403(b) Plan Survey from the Plan Sponsor Council of America (PSCA), sponsored by Principal Financial Group, surveyed nearly 400 nonprofit retirement plan sponsors on outcomes during 2020. Nearly 30% of organizations, including 43% of large groups, said they have automatic enrollment in 403(b) plans, up from 24.4% in 2019. More than half (56.3%) of plans with automatic enrollment now also automatically escalate the default deferral percentage over time.
“Nonprofit workers’ continued commitment to retirement plan participation, even in the face of economic uncertainty, affirms the importance of these programs, and the value of the education provided by employers,” Hattie Greenan, director of research and communications at PSCA, said in a statement announcing survey results. “The use of automatic enrollment has been shown to not only increase participation, but participant outcomes.”
About 1 in 8 nonprofits (12.5%) reduced or suspended plan contributions, reducing the overall average from 6.3% of pay in 2019 to 4.6% in 2020. Likewise, workers’ saving rates slipped to an average of 6.2%, down from a peak of 7.2% in 2019. The increase in adoption of automatic enrollment may have contributed to this decline, according to the survey, given the default deferral rate is 3% or less in the majority of plans (63.6%).
While there were increases in plan loans (13.6% in 2020 versus 11.8% in 2019) and hardship requests (1.3% from 0.8% the year prior), the increases were modest in view of the pandemic’s impact and the expanded access afforded by the CARES Act.
“There is no doubt that the nonprofit sector has been disproportionately impacted by the economic strains of the pandemic, particularly in certain fields, and some had to make the financial decision to cut back on plan contributions and savings,” said Greenan of the PSCA. “The good news is that this was still a small percentage of all organizations, and even for those, many are already reinstating, or making plans to reinstate, their contributions.”
Nonprofits were leaders when it came to annuities or investment options focused on environmental, social, and governance (ESG). More than half (53.5%) of 403(b) plans reported offering annuities as a distribution option that would provide guaranteed income in retirement compared with 17.2% of 401(k) plans that provide that option. Among asset classes available to participants, 37.7% of those surveyed offer ESG compared to an average of 2.6% in 401(k) plans.
Just about half (49.5%) of 403(b) plans now offer Roth after-tax contributions, up from 46.8% in 2019. The availability of investment advice for participants increased as well, to 41.6% in 2020 from 36.7% the year prior. And, more plan sponsors are monitoring investment results on a more frequent basis, with 40.3% noting quarterly monitoring versus 38.5% in 2019.
“The survey results show resilience among organizations and workers that arguably faced the biggest challenges during the pandemic: hospitals, foundations, schools, and the arts,” Kevin Morris, vice president and chief marketing officer, Retirement and Income Solutions at Principal, said. “As we move into the next phase of recovery, it’s as important as ever that nonprofits are supported in providing strong retirement benefits and education to their workforce to continue to help participants feel more financially secure.”