Data & Research August 28, 2008

The Effort Is Working, Vanguard Says

Participants are embracing automatic savings and investment tools, according to a Vanguard analysis.

Reported by

An analysis by Vanguard of the more than 2,200 defined contribution (DC) retirement plans it administers shows plan participants are embracing automatic savings and investing tools offered by sponsors following passage of the Pension Protection Act (PPA) and Qualified Default Investment Alternative (QDIA) guidance.

According to the Vanguard report How America Saves 2008, more than 300 Vanguard-administered plans had adopted automatic enrollment by year-end 2007—triple the number of plans that had the feature in 2005. In 2007, Vanguard plans with automatic enrollment accounted for 15% of total plans but one-third of total participants.

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In addition, following passage of the PPA, two-thirds of automatic enrollment plans have implemented automatic annual savings rate increases, up from just one-third in 2005.

As of year-end 2007, one-quarter of Vanguard-administered DC plans have chosen a QDIA authorized under Department of Labor regulations issued after the PPA, including plans with automatic or voluntary enrollment. Of those plans choosing a QDIA, 84% selected a target-date fund and 16% a balanced fund. Only 4% of Vanguard plans still use a money market or stable value fund, down from 25% at year-end 2005.

Among plans at Vanguard, 84% offered life-cycle options in 2007, up from 33% in 2000. Four in 10 participants owning target-date funds have 100% of their account in a single target-date fund, according to the report.

Other DC Findings

The Vanguard report also says that:

Overall participation and contribution rates remained unchanged in 2007, indicating that participants stayed the course despite deteriorating economic and market conditions. In 2007, 75% of employees of companies with plans at Vanguard participated in their 401(k) plans, with an average contribution rate of 7.3%—both figures are essentially unchanged since 2000.
The Roth 401(k) feature, an after-tax contribution option that became available in 2006, had been adopted by 24% of the Vanguard plans and 6% of their participants by the end of 2007.
A shift away from company stock holdings first observed in 2006 continued into 2007. Among plans offering company stock as an investment option, the number of participants who invested more than 80% of their accounts in that stock fell almost by half, from 15% in 2005 to 8% in 2007.
During 2007, just 17% of participants eligible for a cash distribution from their plan elected one. The remaining participants kept their assets in retirement accounts, either leaving the assets in place or else rolling them over to an IRA or another qualified option. In total, 97% of all plan assets available for distribution were preserved in retirement accounts.
Overall trading levels were low, with only 15% of participants making one or more trades during 2007.
In 2007, the level of outstanding loans was essentially unchanged from recent years. Only 16% of participants had an outstanding loan, borrowing about 12% of their account on average—figures very similar to previous years. About 2% of aggregate plan assets were borrowed by participants.

The full report is available here.

In Practice August 28, 2008

Gen X, Y Support Autoenrollment

An overwhelming 85% of surveyed members of Generations X and Y think it’s a good idea for employers to voluntarily enroll workers in a retirement savings plan, according to a new study.

Reported by

Ellie Behling

Younger workers are in favor of the do-it-for-me approach. According to a study from the American Savings Education Council (a program of the Employee Benefits Research Institute), most of the younger generations (ages 19 to 39) favor employers taking a more active role in savings. Gen Xers (in this study, born between 1968 and 1979) are stronger supporters than Gen Yers (49% of those in Gen X think autoenrollment is a very good idea, compared with 40% of Gen Yers).

Advisers should be aware that a significant minority of Gen X and Y are pretty clueless about retirement savings. For instance, 13% overall (19% of Gen Yers) are not sure whether they are covered by a traditional pension plan. On the defined contribution side, 10% overall (17% of Gen Yers) do not know whether or not they are eligible for their company’s 401(k) or 403(b) plan, according to the study.

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While the study shows that many in Gen X and Y have started thinking about retirement (almost half have at 42%), it has not necessarily translated into savings. Gen Xers (45%) are more likely than Gen Yers (27%) to have personally started saving for retirement.

Parents, Peers, Professionals, Periodicals …

Gen X and Y report many ways in which they receive financial information. More than half of Gen Y and X turn to a financial professional for advice.

However, even more turn to their parents or the Internet. According to the study, 70% listed parents as a major or minor source of advice, and almost the same number (69%) listed the Internet. Also, don’t underestimate the power of peers: Friends and peers are also at least a minor source of advice for 60% of people in Generation X and Y—but not likely to be the primary source.

What might be interesting for advisers trying to reach these groups of participants is that these younger generations are certainly likely to receive information online, but also obviously just as receptive to human interaction in order to receive financial advice.

Slight more than half of both generations report using a financial professional to obtain advice, with 54% citing a financial professional as a major or minor source of advice, according to the study. One-quarter report a financial professional as a major source of advice (23%), and 20% site a professional as their primary source.

Members of Gen X are more likely than Gen Y to cite a financial professional as a major source of advice (27% of Gen X vs. 18% of Gen Y), the study reports. And as can be expected, those with a higher education and income are more likely to use a financial professional as a primary source of advice.

The employer is definitely a source of information for Gen X and Y as well. About half (53%) cite their or their spouse’s employer as at least a minor source of financial advice, but only a small number (7%) cite employers as a primary source. The media and other relatives also received significant percentages as sources of information.

The full Preparing For Their Future study is available here.