More Participants Getting Investment Help

Nearly 30% of participants in 401(k) retirement plans at Vanguard are in automatic, professionally managed investment programs, according to Vanguard’s How America Saves 2011.
By year-end 2010, 29% of Vanguard participants were entirely invested in one of these programs, which include a single target-date or balanced fund or a managed account advisory service. Twenty percent held one target-date fund – a dominant trend because 79% of plans offered target-date funds as of year-end 2010. Another 6% held one traditional balanced fund and an additional 3% used a managed account program. In comparison, in 2004, just 7% of all Vanguard participants were solely invested in an automatic investment program.

In addition to automatic investment programs, Vanguard reports many
participants are using advice services offered in the plan. Three in 10 plans offered online advice and one in eight offered managed accounts. Financial planning services are offered to all participants with plan sponsor authorization, but a fee may apply to those younger than 55. In all, about 15% of participants use advice services if offered, with managed accounts the most popular.

When the 15% of advice users (including those in managed accounts, considered both an advice service and an automatic professionally managed investment program) are added to participants invested in a single target-date fund (20%) and a single balanced fund (6%), more than 40% of participants are taking advantage of investment management programs or advice services when they are offered through their plans.

Account Balances Up, Despite Lower Participation  

In 2010, average ($79,077) and median ($26,926) account balances reached their highest level since Vanguard began tracking this data in 1999, according to Vanguard’s How America Saves 2011.  

The median account balance for participants in their plan at both year-end 2007 and year-end 2010 grew by 31%. Eight in 10 of these “continuous” participants saw their balances rise or stay flat. Results for pre-retirees 55-64 were almost identical to those for the overall continuous participant population.  

Twenty-four percent of Vanguard plans have adopted automatic enrollment, up three points from 2009. Yet, the 2010 plan participation rate was 74%, down two points from 2009. Increases in participation from the growing use of automatic enrollment were offset by participation declines caused by difficult economic conditions, Vanguard said.   

The average deferral rate in 2010 was 6.8% and the median was 6.0%, unchanged from 2009. Yet, average deferral rates were down from their peak in 2007 of 7.3%. About half of the decline was likely caused by economic conditions and half was attributable to increased adoption of auto enrollment. 

Vanguard explained that while auto enrollment increases participation rates, it can also lead to declining plan contribution rates because default deferral rates are typically set too low at 3% or less and participants do not tend to increase their deferrals on their own.  

Employee and employer contributions combined are also down modestly. This average contribution rate in 2010 was 9.7% and the median was 8.8%.  

Other findings of the Vanguard analysis include: 

  • With the current focus on plan fees, more plan sponsors are interested in offering an “index core,” a comprehensive set of low-cost index options that span the global capital markets. In 2010, 40% of Vanguard plans offered a set of options with an index core, making the design available to about half of all Vanguard participants. 
  • New loan issuance rose in 2009 and 2010, returning to prerecession levels of 2005. In 2010, 18% of participants had a loan outstanding. 
  • The number of hardship withdrawals grew 47% during the 2005–2010 period. The 2.2% of participants taking hardship withdrawals in 2010 is still low on an absolute basis.  
  • The majority (70%) of participants who left their employer in 2010 and were eligible for a distribution preserved their plan assets for retirement by remaining in the plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 92% of all plan assets available for distribution were preserved. 
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