Benefits April 1, 2011

NAGDCA Offers Statistical Snapshot of Government Plans

April 1, 2011 (PLANSPONSOR.com) – An average 22% of eligibles participated in state and local government plans during 2010, down from 29% a year before, according to a new report.
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That was but one statistic offered from a recent survey by National Association of Government Defined Contribution Administrators (NAGDCA) of 401(k), 401(a) and 457 programs.

The NAGDCA data indicates that by the end of 2010, responding 457 plans reported that 4.9 million employees were eligible to participate and 1.1 million of those employees actively made deferrals, giving responding 457 plans a participation rate of 22%. The 401(k) respondents reported that 2.7 million employees were eligible to participate and of those, 512,998 employees actively made deferrals, giving responding 401(k) plans a participation rate of 19%. Finally, 401(a) respondents reported that 885,817 employees were eligible to participate and of those eligible 218,047 employees actively made deferrals, giving responding 401(a) plans a participation rate of 25%.

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Further, according to NAGDCA, as of December 31, 2010, the average participant account balance for the responding state and local government plans was $41,243, while the median was $23,497.  The average/median participant account balance for responding 457 plans was $42,468/$24,804 and the average for 401(k) plans was $39,285/$13,525. The average for 401(a) plans was $38,301/$35,579, and the average participant account balance for responding 403(b) plans was $40,889/$11,482.

The average annual deferral for the responding state and local government plans was $3,884.

As of December 31, 2010, 33% of all responding governmental plans had assets valued between $101 and $499 million and twenty-five percent were valued between $1 and $5 billion. Eighteen percent of plans assets were valued between $500 and $999 million and eighteen percent had $100 million or less in plan assets. Six percent of responding plans had assets valued over $5 billion. The 2011 NAGDCA Defined Contribution Plan survey covered 111 government defined contribution plans, including: 457 – 76 plans (43 state, 32 local, 1 education); 401(k) – 16 plans (11 state, 5 local); 401(a) – 17 plans (9 state, 5 local, 2 education, independent agency);403(b) – 2 plans (2 state). These plans had approximately 1.8 million active participants in 2010 compared to 1.5 million in 2009.

In addition to the defined contribution plan, the following retirement benefits are offered: ninety-two percent offer a defined benefit plan, ninety percent offer retiree health insurance benefits, and eighty-four percent of plans reported their employer does participate in Social Security.

A data summary is at http://www.nagdca.org/documents/2011_DC_Survey_Report1392.pdf.

Benefits April 1, 2011

Loan Defaults Costly for Certain Group of Participants

April 1, 2011 (PLANSPONSOR.com) – A Financial Literacy Center working paper suggests that overall, one in ten plan loans results in a default, and eight of ten workers who leave a job with a plan loan outstanding then default on that loan.
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The researchers found “deemed distributions” due to loan defaults amounted to $600 million in 2007, representing 0.2% of $3.7 trillion in assets held in DC plans, so loan defaults in aggregate terms are thus small, compared to total assets held in DC plans. However, the analysis found loan defaults may be costly for particular groups of participants such as the economically vulnerable or financially unsophisticated.  

The researchers analyzed a dataset consisting of over 100,000 retirement plan participants who terminated employment with a pension loan outstanding, during the three-year period July 2005 – June 2008. Among 401(k) plan borrowers terminating employment, approximately 80% defaulted on their loans and 20% repaid them.  

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The working paper said participants who defaulted on their loan were more likely to have larger loan balances than those who repaid; defaulters also had lower household incomes, smaller 401(k) balances, and lower non-pension financial wealth. “This suggests that loan defaults may arise from liquidity constraints around the time of employment termination,” the researchers wrote.  

The study found other plan and participant factors also matter. For instance, participants leaving their employer with multiple loans outstanding are more likely to default, compared to those with a single loan (even after controlling for total amount borrowed and demographics). This suggests that there is unobserved heterogeneity in credit demand or in behavioral factors such as self control among plan borrowers. Thus participants who taking out one large loan may be more likely to plan for the need to repay in the event of job termination.   

Alternatively, participants with several loans might fail to plan ahead, and thus take several small loans as the need arises, or perhaps they keep borrowing as their plan balance rises over time. In other words, having a one-loan per person limit might protect participants from accumulating more debt than they otherwise might.  

The researchers found local economic conditions have little impact on 401(k) loan defaults during the period analyzed.  

The working paper is at http://www.rand.org/pubs/working_papers/2010/RAND_WR799.pdf.

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