Automatic enrollment increases participation, but it also has a positive effect on other auto features, the analysis finds. Among plans that automatically enroll employees, 69% also automatically increase their contribution rates annually and 98% use target-date funds, a balanced investment option or managed account as the default investment option. Vanguard’s report is an annual look at investor trends in the 401(k) and other defined contribution (DC) retirement plans that the firm administers.
The use of auto features has a particularly positive impact on low-income, young, and minority workers, who are showing gains in participation and contribution rates, the report says. By income level, workers earning less than $30,000 showed the most dramatic gains in participation, when comparing voluntary enrollment (34%) with automatic enrollment (78%). As income levels increased, the gain dropped; among the highest paid workers participation from voluntary enrollment was 88% versus 96% from automatic enrollment.
Other stark gains are seen in enrollment by race when auto enrollment is implemented. Among African Americans earning less than $29,999, participation was 35% with voluntary enrollment and 93% with auto enrollment. Hispanics in the same income category show participation rates of 36% and 94%, respectively. Both demographics have some economic challenges. (See “Hispanic Americans Face Saving Challenges” and “Progress, Hurdles Continue for African Americans.”)
These improvements in savings, and in increases, in enrollment from the use of auto features will continue to push upward, says Jean Young of Vanguard’s Center for Retirement Research and lead author of the report.“We predict over half of Vanguard participants will be using professionally managed options in five years,” Young tells PLANADVISER
Young adds that “in 2013, 62% of new plan entrants joined through automatic enrollment,” noting that initially, auto enrollment applied only to new hires in many plans, but is now increasingly used for eligible nonparticipants in half of those plans. Employees who joined their plan through automatic enrollment had an overall participation rate of 82%, compared with a participation rate of 65% for employees who joined through voluntary enrollment.
Auto Investment Choices
Among the auto enrollment plans that use TDFs, a balanced fund, or managed account as the default investment, nine in10 use TDFs.
TDFs have several advantages over managed accounts or balanced funds, Young says. Among other things, they may help participants focus on a specific year they might retire, perhaps acting as an engagement device. “TDFs, especially indexed TDFs, tend to have a lower cost structure,” Young adds. “The advantage of this lower cost structure compounds over time. Most participants aren’t confident in their ability to construct portfolios, but they do have a sense of when they plan to retire.”
In 2013, 40% of participants were solely invested in an automatic investment program, compared with 22% at the end of 2008. Of those, 31% were invested in a single TDF, another 6% held a balanced fund, and 3% used a managed account program. These options can dramatically improve portfolio diversification compared with participants making choices on their own. With the growing use of TDFs, Vanguard anticipates 58% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed option by 2018.
Young states emphatically that professionally managed accounts help improve outcomes for participants. “Professional management gives participants consistently better outcomes compared to those participants who construct their own portfolios,” she says. If left to their own devices to “do it on their own,” she says, the outcomes can be quite scattered. “Some do it right, but is it skill, or is it luck?” she asks.Design for Success
“A quarter of Americans are estimated to be partially prepared for retirement but need help getting the rest of the way,” Young says. Another one-quarter are thought to be at risk for not being able to save enough for retirement altogether. Plan features such as automatic enrollment, annual savings increases and balanced default investment options are ways for employers to do more to help both these groups, she suggests.
Young also recommended re-enrollment, another emerging plan design strategy, in which plan sponsors address portfolio construction issues by moving participants into investments such as TDFs, balanced funds and managed accounts.
Other findings of "How America Saves 2014" include:
- The average participant account balance was $101,650 in 2013. Among continuous participants—those with a balance between year-end 2008 and 2013—the median account balance rose by 182%, reflecting both the effect of ongoing contributions and market returns during this period. "Balances are now well ahead of the peak levels achieved prior to the global financial crisis. The effects of the market decline on retirement savings are now firmly in the past," Young says.
- Given the growing focus on plan fees, more plans are offering a wider range of low-cost index, or passive, funds. In 2013, nearly half of Vanguard plans offered an index core, which is a comprehensive set of low-cost index options that span the global capital markets.
- Large plans have adopted this approach more quickly, resulting in about 60% of all Vanguard participants offered an index core. Factoring in indexed TDFs with their equity and fixed-income mix, 84% of participants hold equity index investments.
”How America Saves” is based on an analysis of Vanguard’s recordkeeping plans. The findings are based on overall retirement saving and investing behavior of Vanguard’s more than three million participants, and the report includes supplemental reports about participant patterns in the defined contribution (DC) retirement plans of 12 industries. The report can be accessed from Vanguard’s website.