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5500 Preparer's Manual for 2012 Plan Years
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from Spencer’s Benefits Reports: The percentage of active participants who have ended their contributions to a defined contribution plan increased in 2008, at the same time as the average annual participant contributions have increased, according to statistics compiled by the Vanguard Center for Retirement Research. Vanguard found that 3.1% of active participants in defined contribution plans stopped making elective deferrals sometime during 2008, versus 2.4% who did so in 2007 and 2.5% who did so in 2006.
There might be a variety of reasons for stopping elective deferrals in times of economic distress, such as rising financial obligations or the need for savings outside of a retirement plan as a reaction to the risk of unemployment. The 3.1% figure is not higher, Vanguard suggests, because inertia remains quite powerful, causing fewer participants to end participation in their savings plan.
November 2008 saw a large increase in the percentage of participants ending their elective deferrals. “One likely explanation is that participants were reacting to exceptional market volatility during that month,” Vanguard suggested. There is a seasonal pattern to participants ending their elective deferrals, with an increase in the last four months of the year. “It may be just a coincidence that the rate of discontinued contributions rises near the holidays, typically a time of competing spending priorities,” Vanguard added. The rates in October-December 2008 were higher than in the same periods of 2007 and 2006.
Vanguard found that the decision to stop elective deferrals is not isolated to households with lower earnings. More than three-fourths (76.4%) of the participants ending elective deferrals in 2008 had household incomes of $50,000 or more. Younger participants were more likely to end elective deferrals (average age 43.0) than were those who continued making elective deferrals (average age 44.9).
Despite an increase in the percentage of participants ending their elective deferrals, the average annual participant contribution grew by 5% in 2008 (to $6,668 from $6,371 in 2007). The average contribution grew by 8% in 2007 (to $6,371 from $5,916 in 2006). At the same time, the median annual participant contribution grew by 7% in 2008 (to $4,892 from $4,588 in 2007). The median grew by 10% in 2007 (to $4,588 from $4,172 in 2006).
The Vanguard study is based on 1.3 million active participants in Vanguard plans and does not include those individuals who terminated employment during the year or who stopped contributing because they reached the IRC Sec. 402(g) contribution limit. The analysis only involves pretax employee elective deferrals and does not include employer contributions. A copy of the survey can be found at http://www.vanguard.com/retirementresearch.
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