Market Moved Participants – But Not Far

September 10, 2009 ( - The recent market tumult certainly took a toll on participant balances, but a new report suggests that it might have been less than some feared.

In “The Total View 2009”, a report on the retirement plan business of The Principal, 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 notes 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 notes 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 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 50-64 and an 11.0 percentage point increase for ages 65+ 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 50-65 there was only a 3.1 percentage point increase; and an increase of only 0.3 percentage points for participants ages 65+ in this category in 2008.

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 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.

The market decline in 2008 caused defined benefit pension plans' funded percentages to decline sharply, according to the report. Based on contribution and funded percentage results of a limited cross-section of DB plans with services provided by The Principal:

Every plan experienced a decrease in the market value of assets, ranging from -7% to -38%.

The average funding level dropped from 94% in 2008 to 68% in 2009.

Every plan is expected to have an increase in the required contribution for 2009 with the smallest increase being 11% and the largest at 537%. One-third of the plans will increase more than 100%.

As for the implications of this underfunding, Principal said it anticipated:

  • More plans will be subject to benefit restrictions.
  • More plans will have to freeze accruals.
  • Employer contributions for 2009 and beyond will increase significantly, provided there is no additional legislative relief.
  • More plans will be subject to 4010 filings.
  • More employers will achieve "at risk" status, creating additional funding and restrictions on companion nonqualified plans.

As for pension plan asset allocations, Principal said that "many plan sponsors are reexamining their asset allocation with asset liability modeling (ALM) studies, increasing the number of studies by more than 200% in 2009. However, the report also noted that "…most plan sponsors have not begun to move assets to a Liability-Driven Investing (LDI) style mix", but Principal said they are nonetheless "looking closely at a strategy that moves assets to a less volatile allocation as their funding levels improve".

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 online at

A summary of the report's findings can be found at