More Participants Choosing Professionally Managed Investments

One-third of all 401(k) plan participants in plans recordkept by Vanguard invested their entire account balance in a professionally managed asset allocation and investment option in 2011.

According to Vanguard’s How America Saves 2012 report, 24% of participants were in a single target-date fund (TDF); 6% in a single traditional balanced fund, and 3% in a managed account advisory program. The total number is up from 9% at the end of 2005.  In addition, in 2011, a total 18% of participants took an extreme position in equities, holding either 100% in equities (10% of participants) or no equities (8%), compared to 34% who did so in 2005.  

Fueling much of the growth of these programs is the soaring adoption of TDFs, Vanguard contends. Eighty-two percent of plan sponsors offered target-date funds in 2011, up from 28% in 2005. Forty-seven percent of all participants use TDFs. While the growth of these funds is frequently attributed to their designation as the default investment in automatic enrollment plans, many participants are voluntarily choosing TDFs. In plans with voluntary enrollment, 48% of participants are invested in TDFs. 

Vanguard believes the surge of TDF usage will continue to influence the adoption of professionally managed allocations. “Largely because of the growing use of target-date options, we anticipate that 55% of all participants and 80% of new plan entrants will be entirely invested in a professionally-managed allocation by 2016,” said Jean Young, chief author of How America Saves.  

The annual Vanguard report found in 2011, the plan participation rate was 76%, unchanged from 2010. Automatic plan enrollment continues to rise. In 2011, 29% of Vanguard plans had adopted automatic enrollment, up 2 percentage points from 2010. Employees in plans with an automatic enrollment feature at the end of 2011 had an overall participation rate of 80% compared with a participation rate of only 60% for employees in voluntary enrollment plans. Seven in 10 automatic enrollment plans have implemented automatic annual deferral rate increases, up from three in 10 in 2005.



The average participant deferral rate rose to 7.1% and the median (the median reflects the typical participant) was unchanged at 6%. The aggregate average plan savings rate—including both participant and employer contributions—was 10.4% in 2011. Vanguard’s view is that investors should save 12% to 15% or more.  

The median account balances of continuous participants—those with an account balance at both the end of 2010 and 2011—rose by 10%. Eight in 10 of these continuous participants saw their balances rise because of conservative asset allocations (for example, being invested exclusively or predominantly in fixed income holdings) and ongoing contributions. In 2011, the median participant account balance was $25,550 and the average was $78,296.  

In 2011, 18% of participants had an outstanding loan, unchanged from the year before. Only 4% of participants took an in-service withdrawal. In addition, participants separating from service largely preserved their assets for retirement. During 2011, about 30% of all participants could have taken their account as a distribution because they had separated from service in the current year or prior years. The majority of these participants (83%) continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an IRA or a new employer plan. They preserved 96% of the available assets.  

With the intensifying focus on plan fees, plan sponsors are increasingly interested in offering a wider range of low-cost index funds, including an “index core,” a comprehensive set of low-cost index options that span the global capital markets. In 2011, 44% of Vanguard plans offered a set of options providing an index core. Because large plans have adopted this approach more quickly, slightly more than half of all Vanguard participants were offered an index core as part of their plan’s overall investment menu.   

How America Saves is based on an analysis of Vanguard’s full-service recordkeeping plans. Along with looking at the overall retirement saving and investing behavior of Vanguard’s more than three million participants, How America Saves this year includes supplemental reports on participant patterns in the DC retirement plans of 12 specific industries.  

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