2009 a Good Year for DC Participants – Considering…

The latest study by The Vanguard Group of its defined contribution recordkeeping data was full of good news with word that many of the 3.2 million participants in plans it recordkeeps ended 2009 in relatively good retirement shape despite the economic downturn.

A Vanguard news release about its “How America Saves 2010” report said many participants in 2009 experienced higher account balances, traded minimally in response to market volatility, increasingly diversified their assets through automatic investment programs, and protected their retirement nest egg when they left their employer. The study included data from 2,200 DC plans.

Only ”a very small group of participants” appeared to be hurt by the economy, leading to a “modest” decline in plan participation and savings rates and slight increases in loans and hardship withdrawals, Vanguard said. 

“Despite the financial maelstrom of the past few years, we’re seeing positive signs for many participants in employer-sponsored retirement plans,” said Steve Utkus, head of Vanguard’s Center for Retirement Research and a co-author of the report, in the news release. “While there continue to be opportunities to improve saving rates and asset allocations, employees covered by these plans are benefiting from improved plan design, such as automatic enrollment and automatic deferral rate increases, as well as target-date funds.” 

According to the Vanguard data, the average account balance at the end of 2009 was $69,000, up 23% from year-end 2008. About two-thirds of participants had account balances at the end of 2009 that were higher than they were in September 2007, just prior to the stock market peak in October 2007.

The median account balance rose by 10% for participants who had a balance in September 2007 and at year-end 2009, reflecting the effects of improving asset values and ongoing contributions. Over this 27-month period, only 6% saw declines of more than 30%.


Professional Management  

Further, 25% of all Vanguard participants were solely invested in a professionally managed automatic investment option in 2009, such as a target-date fund, a balanced fund, or a managed account program—compared to 7% five years ago. Sixteen percent of all participants were invested in a single target-date fund while another 6% held one traditional balanced fund, and 3% utilized a managed account program. 

“Diversified, professionally managed automatic investment options help to eliminate portfolio construction errors and can dramatically reshape retirement plan outcomes,” said Vanguard researcher and report lead author Jean Young, in the news release. “It is encouraging that 25% of our participants have turned to target-date funds and other diversified balanced programs managed by investment professionals. The challenge is continuing to reach more participants who may stand to benefit from these programs.” 

In particular, the adoption of target-date funds continues to grow. By year-end 2009, 75% of Vanguard plan sponsors offered target-date funds and 42% of participants in those plans used the funds. As a result, one-third of all Vanguard participants have part, or all, of their retirement plan account invested in a target-date fund. Half of these participants voluntarily chose their target-date funds versus being defaulted into them by their plan sponsor.   

In plans administered by Vanguard, the 2009 plan participation rate was 75%, down 2 percentage points from 2008. Increases in plan participation due to the growing use of automatic enrollment were offset by the number of participants who chose to stop participating, likely due to difficult economic conditions. Yet there was a marked increase in participation rates among lower-income and younger employees, a likely result of automatic enrollment. 

The average employee deferral rate in 2009 was 6.8%, declining slightly from their peak in 2007 of 7.3%. Vanguard estimated that about half of the decline in contribution rates may be due to the economic environment and the other half results from increased adoption of automatic enrollment. Three-quarters of automatic enrollment plans set their default deferral rate at a low 3% or less, reducing the overall contribution rate, according to the report.

Once employer contributions are added in, the average contribution rate in 2009 jumped to 9.4%. Some participants will be aided by automatic annual deferral rate increases; three-quarters of automatic enrollment plans had implemented such increases by the end of 2009, up from about one-third in 2005. 

The Vanguard report is at https://institutional.vanguard.com/iam/pdf/HAS.pdf . More information about the data is here.