Data & Research February 4, 2014

Vanguard Reports Record 401(k) Balances

Investment management firm Vanguard reports that the average account balances for 401(k) plan participants reached a record high of $101,650 at year-end 2013.
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That figure is 18% higher than 2012 and the highest average balance recorded since Vanguard, based in Valley Forge, Pennsylvania, began tracking such figures in 1999.

Preliminary data from Vanguard shows several key trends for 2013 in its 401(k) and other defined contribution retirement plans. The figures, drawn from the company’s recordkeeping data, show the following:

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  • More companies are automatically enrolling employees into their plans. In an increase fueled mostly by larger plans (those with 1,000 or more participants), 34% of Vanguard plans, including 60% of larger plans, have taken this step to help their employees save for retirement. This is up from 24% from five years ago.
  • The use of professionally managed investment options within 401(k) plans continues to rise. Forty percent of Vanguard participants now use one of these options, which include target-date funds, other balanced funds, and a managed account program.
  • More than half (52%) of Vanguard plans are offering the Roth 401(k) feature, which enables participants to contribute after-tax income to their plan account. Because large plans were early adopters of this feature, this growth is coming primarily from smaller plans (those with less than 1,000 participants).
  • More participants appear to be actively engaged in their retirement plans. In 2013, 60% of participants proactively contacted Vanguard via phone or the web about their plan account, compared with slightly over one-half (53%) of participants doing so 10 years ago.
  • Despite continuing economic uncertainties, participants are not accessing the money in their accounts through loans or withdrawals any more than they have in the last several years. The number of Vanguard participants who have an outstanding loan or who took a withdrawal remained steady at 18% and 4%, respectively.
  • Of the participants who left their company’s employment during the year, an increasing number—85% in 2013 compared with 82% five years ago—kept their money in the former employer’s plan, thus preserving those assets for retirement.

“While there is more to be done to help Americans save more effectively for their retirement, these are positive trends that show we are clearly moving in the right direction,” says Jean Young, senior analyst at the Vanguard Center for Retirement Research.

Additional data and trends will be released in Vanguard’s “How America Saves 2014” report, of which Young is the lead author. The report is scheduled to be issued in June.

The Markets February 4, 2014

New Year Brings Pension Setback

Funding levels of pension plans sponsored by S&P 1500 companies fell 6% in January, according to data from Mercer.
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This resulted in a funded ratio (assets divided by liabilities) of 89% at the end of the month. The collective deficit of $232 billion as of January 31, 2014, is up $129 billion from the estimated deficit of $103 billion as of December 31, 2013.    

In addition, steep U.S. equity market drops on the first trading day of February are estimated to have shaved nearly 2% more off of the funded status.

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Equity markets fell more than 3% during January, based on the S&P 500 Index. Compounding problems, the yields on high grade corporate bonds also fell, leading to an increase in pension liabilities. The Mercer Yield Curve discount rate for mature pension plans dropped 35 basis points during the month after having risen almost a full percent during 2013.

“This was a rough start to the year for plan sponsors.” says Jonathan Barry, a partner in Mercer’s retirement business. “After a record-breaking 2013 in terms of funded status improvement, it hurts to see such a big step backwards right out of the gate in 2014. 

“This downturn serves as a reminder that there is still a great deal of risk in U.S. pension plans. There are many opportunities available for sponsors to manage this risk, although sponsors need to be prepared to move quickly when opportunities present themselves. Even with this dip in January, funded status and interest rates are still well above where they were last year, and the recent increases in PBGC premiums are making many sponsors consider funding their plans more aggressively as well as looking at risk transfer strategies such as cashouts and buyouts. We still see 2014 as being a big year in terms of pension risk management initiatives.”

Mercer’s Pension Buyout Index shows that as of the start of the year, pension buyouts are a more attractive option than before (see “PBGCPremium Hikes Shake Up Buyout Landscape”).

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