Advisers Can Help Sponsors Tackle Plan Problems

Vanguard's annual study examines the rise of automatic plan features and sponsors' growing sense of responsibility for participant outcomes.

The 2015 edition of Vanguard’s “How America Saves” study shows how plan advisers can help their sponsor clients to continue to develop the defined contribution (DC) workplace savings model.

The study outlines increased use of automatic enrollment among the Vanguard client base. At year-end 2014, 36% of Vanguard plans had implemented auto-enrollment, a 50% increase since 2009. Today, approximately 60% of newly hired employees participating in Vanguard 401(k) plans were automatically enrolled.

“Moreover, although this feature was traditionally used only with newly hired employees, sponsors of half of Vanguard plans have now chosen to apply it to eligible nonparticipants,” the firm explains. “In addition, seven in 10 auto-enrollment plans have implemented automatic annual deferral-rate increases.”

Vanguard says these two approaches are leading to very meaningful jumps in retirement readiness for participants.

“The first step in retirement savings is participation,” says Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research. “Over the past decade, we’ve seen a meaningful jump in total participation rates. Three-quarters of eligible workers now participate in their employer’s plan, up from two-thirds 10 years ago, underscoring the impact of autopilot plan designs.”

Another positive trend is a marked shift toward optimally designed portfolios for participants, Vanguard says—especially the use of automatic asset-allocation solutions based on a target retirement date or a targeted level of portfolio risk.

“The value of age- and risk-appropriate portfolio construction choices is most prominently reflected in the continued growth of target-date funds [TDFs], particularly as the default investment option,” Vanguard finds. “With 88% of plan sponsors offering target-date funds, nearly all Vanguard participants have access to this professionally managed and diversified investment choice, and 64% take advantage of this option. Last year, $4 of every $10 deposited in Vanguard plans was invested in target-date funds.”

According to Vanguard’s research, TDFs and other professionally managed allocations “have the added benefit of reducing extreme allocations and establishing appropriate risk levels for participants.” As of year-end 2014, roughly one in eight employees held an extreme allocation position. For example, 8% of participants held only equity investments, while 5% held no equity investments in their portfolios.

These numbers are still too high, Vanguard says, but 10 years ago, one in three participants held an extreme allocation position, so things are getting better. This is also true of extreme allocations to company stock, Vanguard notes.

“In addition to the broad adoption of diversified, balanced investment programs, there has been a dramatic shift away from company stock,” the study notes. “Only 8% of participants held a concentrated stock position at the end of 2014 [employer stock or otherwise], compared with 18% a decade prior—more than a 50% improvement.”

Additional findings from the research can be explored here.