Participation Rates in 401(k) Plans Reach All-Time High

Plan sponsors have driven plan participation in the last 15 years to a record high in 2022, Vanguard reports.  

After adoption of automatic enrollment increased consistently over 15 years, plan participation reached a record high in 2022.

Automatic enrollment and automatic annual increases have driven participation rates in 401(k) plans recordkept by the Vanguard Group to an all-time high, according to the firm’s annual “How America Saves” report.

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Since the passage of the Pension Protection Act in 2006, adoption of automatic enrollment has more than tripled, according to the Valley Forge, Pennsylvania-based asset manager. The study indicated that at year-end 2022, nearly 58% of plans and 76% of plans with at least 1,000 participants have adopted the design. Accordingly, last year saw record plan participation of 83%.

The news from Vanguard comes as the SECURE 2.0 Act of 2022’s first provision, Section 101, requires auto-enrollment and auto-escalation for new plans. 

“To date, many of our plan sponsors and consultants have taken tangible steps to improve plan design with features such as automatic enrollment and automatic escalation,” John James, managing director of the institutional investor group at Vanguard, said in a statement. “Many are starting to make their plan a destination by introducing financial wellness features to their benefits packages.”

Vanguard also found that participants kept saving in 2022 despite market volatility. The average deferral rate was 7.4%, a record high, and nearly 98% of plan sponsors also offered some type of employer contribution, helping the total average contribution rate reach 11.3%.

Meanwhile, participant trading in retirement plans was muted in 2022. Only 6% of defined contribution plan participants traded within their accounts. On a net basis, there was a shift of 1% of assets to fixed income during the year, with most traders making small changes to their portfolios.

Participant trading has declined significantly over the last 15 years, and Vanguard’s report attributed the decline to the increased adoption of target-date funds and retirement savers valuing buy-and-hold strategies.

“Building on the proven benefits of smart plan design, employers are increasingly exploring more comprehensive efforts to help their employees reach their long-term financial goals,” James said in a statement. “In addition to advice, forward-thinking plan sponsors are offering financial wellness tools such as student debt paydown and supplemental savings accounts like HSAs.”

Vanguard data included in “How America Saves 2023” report was drawn from several sources, including the firm’s defined contribution clients and recordkeeping clients.

Lawsuit Targets SaveATree Subsidiary ESOP, Trustees

The Arborwell Inc. employee stock ownership program began in 2017, but the plaintiffs allege the ESOP’s 2020 sale to CI Quercus was for less than market value.

Two companies have sued co-trustees of the Arborwell Inc. Employee Stock Ownership Plan, alleging eight fiduciary breaches that harmed participants’ retirement assets. 

Plaintiffs Arborwell LLC and CI Quercus Corp. Inc., represented by law firm Shartsis Friese LLP, brought a complaint on June 5 under the Employee Retirement Income Security Act, alleging ESOP co-trustee defendants—Alerus Financial, Andrew LaVelle, Anne Sortwell, Peter Sortwell and Neil Woolner—knowingly participated in transactions prohibited by ERISA. The suit, filed in U.S. District Court for the Northern District of California, claims the defendants orchestrated for their benefit the 2020 stock sale of Arborwell LLC’s predecessor entity, Arborwell Inc., by the Arborwell Inc. ESOP to CI Quercus, for less than fair market value.

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“By allowing the Sortwells, LaVelle and Woolner to use the ESOP’s 2020 Sale of Arborwell, Inc. stock to unjustly enrich themselves at the expense of the ESOP and its participants, Alerus breached its fiduciary duties, and knowingly participated in the fiduciary breaches of the Sortwells, LaVelle and Woolner,” states the complaint. “Alerus then further breached its fiduciary duties by failing to take necessary action to remedy the Sortwells, LaVelle and Woolner’s fiduciary breach and to enforce the [Stock Purchase Agreement] SPA.”

ERISA prohibits a plan fiduciary from causing a plan to engage in a sale or exchange of any property with an interested party and also bars trustees from causing the plan to engage in a transaction that constitutes a direct or indirect transfer to a party in interest of any assets of the plan.  

“Out of the $34,700,000 total CI Quercus paid at closing pursuant to the terms of the Stock Purchase Agreement … the ESOP only received $12,467,810 for 100% of the shares of Arborwell, Inc. stock,” the complaint states. “The 2020 Sale and subsequent termination of the ESOP were premature, taking place just over three years after the ESOP had been established in 2017.”

The plaintiffs are seeking monetary damages of more than $75,000, restitution to the plan and other relief that the court deems just and proper, according to the complaint, Arborwell LLC et al. v. Alerus Financial et al. The plaintiffs also requested trial by a jury, should the lawsuit proceed to trial. 

Alerus is a nationally chartered bank; CI Quercus Corp. is a holding company for a family of professional tree shrub and law cares businesses operating throughout the U.S. Those companies include SavATree, which provides tree care services on the East Coast, in the Midwest and on the West Coast, through its 2021 acquisition of Arborwell.

Requests for comment were not returned by the defendants.

This is at least the fifth lawsuit brought against an ESOP this year. In a similar case earlier this month, Three Churchill Mortgage Corp. employees sued fiduciaries, members of the board of directors and the trustee of the Churchill Holdings Inc. Employee Stock Ownership Plan, alleging fiduciary breaches that harmed workers’ vested retirement assets.

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