A Deep Dive into 401(k) Participant Loan Data
March 11, 2019

Last month I attended a conference where I had a couple of interesting conversations on the topic of participant loans.  Financial wellness was a big theme at the conference.  The advisers I spoke with were all trying to use participant loans as a window into the financial health of 401(k) plan participants.  More specifically, they were interested in the ratio of outstanding participant loans to total plan assets.  The idea being, the higher the ratio, the more likely participants are in need of a financial wellness program.

Thinking about this on my way home, I wondered what even constitutes a high participant loan to total assets ratio?  And how much variation is there in this ratio?  One of the great benefits of working at Judy Diamond is having access to the historical 5500 data in its raw form.  The data can then be imported into tools like Tableau or Panda Dataframes to do more detailed analysis.  So once back home, I got to work exploring this aspect of the data.

The Data

To begin the analysis, I gathered all the 401(k) plans available from our raw data feed where both End of Year Total Assets and End of Year Participant Loans were greater than zero.  This yielded about 1.7 million records over 8 years from 2010 to 2017.  Each year contains approximately 220,000 records with 2017 a partial year containing 129,000 records.

Looking at the full data set, the median % of Participant Loans to Total Plan Assets (PL/TPA) is equal to 2.10% but the average is a whopping 22.64%!  We should take this figure with a gain of salt since, as we will see, this data set has a long tail with some major outliers skewing our distribution.

Let’s first break it down by year.

From the historical bar chart, we see that the median PL/TPA ratio has actually been declining from a high of 2.5% in 2011 to a low of 1.6% in 2017 (albeit these are partial year numbers for 2107, but should be reflective of the full year).

What can we glean from this?  Well there is certainly a trend here that could indicate that 401(k) plan participants are borrowing less against their retirement plans.  This would be good news and perhaps a reversion back to a what rates were prior to the Great Recession.  This could be an explanation for the higher rates in 2010 and 2011.  The other explanation may be less in the numerator of this ratio but rather the denominator.

Bull Market in Equities

It’s curious that the start of our downward trend in the PL/TPA ratio corresponds closely to the start of the equity bull market in 2009.  Without further analysis, it’s hard to say which is the correct interpretation.  My guess is that it is a combination of the two.  It stands to reason that, as the economy improved, plan participants were able to repay the loans taken in the immediate aftermath of the Great Recession reducing outstanding loan amounts.  At the same time plan assets would have been boosted by higher equity returns.

A Long Tail Wagging the Dog?

The last point I want to make about this data is how skewed the distribution is.  As mentioned above, the difference between the median PL/TPA ratio to the average is huge.  In fact, there are plans that have 100% PL/TPA ratios.  How this happens will require more analysis and perhaps should be excluded altogether from the analysis.  But to give you an idea of what this looks like, here is the distribution for 2016, the most recent full year of data in our analysis.

Now let’s look all the years in our analysis excluding the values in our tail by limiting the PL/TPA ratios to those between 0 and 5% which will capture the bulk of our plans.

We can see the downward trend in the median PL/TPA ratio represented by the white dot.  But it also appears that the distribution has gotten tighter around the median with 2017 showing the most pronounced tightening.  The black box illustrates the extent of the 25th and 75th percentiles.

So What’s the Right Number?

If you are inclined to believe that the ratio of 401(k) plan participant loans to total plan assets is an indicator of participant financial wellness, you would be best to focus your efforts on plans where this measure exceeds 2%.  But recognize that there are a lot of outliers and financial wellness may not have anything at all to do with this statistic.

Perhaps a look at individual states or looking at micro versus mega plans will yield additional insights.  Stay tuned.

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Red Flag: Bottom 10% in Employer Contributions – For Prospecting? (Yes, Really)
February 04, 2019


In my previous post, I introduced a data point pioneered by Judy Diamond called Red Flags.  These are the 19 proprietary flags identifying retirement plans with problems in plan design, administration or performance.  Red Flags are a hugely valuable tool.  This is especially so when searching the 5500 database to find prospects.  Advisers can use Red Flags to highlight their strengths and present their unique value proposition to sponsors.

Red Flag: Bottom 10% in Employer Contributions

In that first post on Red Flags, we explored High Average Account Balance.  It is the most widely occurring Red Flag among 401(k) plans.  In this post we will take a deeper look at the Red Flag labeled Bottom 10% in Employer Contributions.  It is the second most widely occurring Red Flag.  Together, these two Red Flags make up a little more than a third of plans having one or more Red Flags.  So, how can identifying plans in the Bottom 10% in Employer Contributions be useful for prospecting?

Sponsors offering a low or zero match for participants are generally smaller companies.  Searching the database of 401(k) plans reporting in the most recent filing year (2017), we find about 118,000 plans.  This is one of the reasons this particular Red Flag is so prevalent.  Median statistics for this group show that these are indeed small plans with the median number of participants equal to 5 and total plan assets of $216,588.

Generally speaking, smaller plans offer fewer benefits and not providing a participant match is an easy place to reduce costs.  Unless you specialize in the micro-market, this may not be the best place to focus your efforts.  But wait.  If we rank plans by plan assets, we see a different picture with many plans with hundreds of millions in plan assets.

Separating the Wheat from the Chaff

To get a better sense of what opportunities exist, let’s limit our list based on a measure of plan size.  One such measure is the number of participants.  When we do this and include only plans with 100 or more plan participants, we find 8,699 companies.  And low and behold, the median total plan assets increases to just over $3 million.  Now this is something we can work with as these larger firms will be more receptive to the benefits to be gained in employee recruitment, retention and participant outcomes.

Despite the vast number of smaller plans with the Red Flag Bottom 10% of Employer Contributions, this is still a valuable tool.  But unless your focus is micro-plans, it may be best to use this Red Flag in combination with other criteria.  One strategy is to include a measure of plan size such as total plan participants or total plan assets to find the best opportunities where sponsors may be more interested in increasing their match rate.

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Red Flags – A Powerful Tool for Prospecting
December 24, 2018


In this post, we are going to focus on one of Judy Diamond’s proprietary data points – Red Flags and how to use them in prospecting.  Red Flags are an innovation pioneered by JDA based on 30 years of experience with the Form 5500.  The idea behind Red Flags is to identify retirement plans that have a noteworthy characteristic that is not entirely obvious.  While many of the Red Flags point to potential problems, whether it be with performance, plan design or administration, this is not always the case.

There are nineteen Red Flags identified as important relative to prospecting.  Over the coming months, we will focus on one or more of these flags to provide a more detailed explanation along with some tips on how to use them in your practice.  For a complete list of the 19 Red Flags, click here.

The first Red Flag we will consider is High Average Account Balance.

Most Frequently Occurring Red Flags

High Average Account Balance

High Average Account Balance is the most widely occurring Red Flag showing up in 401(k) plans.  This accounts for nearly 200,000 plans in the 2017 plan year.  This is not surprising considering the median number of participants (10) and the median participation rate (100%) for plans with this flag.  So what is going on here and is it good or bad when focusing on prospecting?

High Average Account Balance is an example of a Red Flag that can be considered a positive screen.   This Red Flag helps to find plans with few participants and participants with a higher than average 401(k) balance.  The average 401(k) balance is $106,000 according to USA Today.  Plans tagged with High Average Account Balance in the JDA Retirement Plan Prospector database have a median account balance of $182,778 – a staggering $77,000 more.

What Types of Plans Have this Red Flag?

What types of firms make up these plans?  Physicians, Lawyers, Dentists, Financial Advisers, and other professional services firms comprise the majority of these plans.  This includes wealthy professionals with small group practices or partnerships that are able to save the maximum in their retirement accounts.

Knowing how to find these types of plans can be helpful in two ways.  First, the business owners and participants are one and the same with these plans. As a result, it is much easier to get their attention regarding plan design or performance issues.  Therefore, whether it is high fees, poor fund selection or performance, you should be able to make a strong case to one of the business owners that it is in their best interest to meet with you.  Secondly, these companies and individual participants are not only valuable retirement prospects but can also be targeted for wealth management services.  As a result, since there are so many plans with this flag, it is relatively easy to find them in most geographic locations.

In future posts, we will take a look at some of the other most prevalent Red Flags.  These include Bottom 10% in Employer Contributions and Insufficient Fidelity Bond Coverage.

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Introducing the JDA Blog!
December 03, 2018

It is my pleasure to announce the launch of the Judy Diamond Associates official blog site. While we have always included resources and research about employee benefits in general and the Department of Labor Form 5500 in specific, we are now doubling our efforts to provide our clients and the community as a whole informative and insightful commentary related to all things 5500.

By the way, if you have not already downloaded our free 2018 401(k) Benchmark Report, please check it out by following this link.

Our goal here is to provide information that can help you gain an edge on your competition by educating you about the intricacies of the data that is available from the Form 5500. This includes not only how it can be used for prospecting but also for market sizing and protecting your business from poachers trying to steal your clients.

Some of the topics you can expect to see in future posts include:

  • CPAs, the 5500 and the 80 – 120 Rule
  • Limitations in the data available in the 5500 and how to get around them
  • How to use Red Flags, the Plan Score and Talking Points to highlight your competitive advantage
  • How bench-marking can be used during investment reviews
  • And, an answer to one of the most frequently asked questions, “Who is Judy Diamond? Is there a real person behind the name?”

Those are just a few of the ideas we have in mind. If you have any questions or ideas you think would be a good topic for us to address, please contact me at the email below.

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