The Effort Is Working, Vanguard Says

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

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.

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.