Vanguard Data Shows Savings Concerns Among DC Participants

A new Vanguard analysis based on its 2006 defined contribution recordkeeping data finds concerns about participants’ plan participation, savings, and investing behaviors.

Vanguard found that participation rates in defined contribution plans are essentially unchanged from 2000 rates. The composite participation rate for all eligible participants across all Vanguard DC plans with an employee-contributory feature was 64% in 2006, meaning one-third of eligible employees failed to join their workforce savings plan.

Almost half of plans allow, and more than half of employees qualify for, immediate eligibility for employee elective contributions, while a one-year eligibility rule is common for company contributions. Vanguard said older or better-paid workers are more likely than younger or lower-paid workers to participate in their employer’s plan and, at all income levels, women are more likely than men to join their employer’s plan.

Participant Saving

Among those who did participate in their DC plans, Vanguard found employee savings rates have also remained essentially unchanged since 2000. Participants contributed an average of 7.3% of salary in 2006, while the median employee contribution was 6.0%. These savings rates are not bad; however, employee contribution rates varied widely, with one-quarter of participants saving 10% or more and about one-quarter of participants saving 4% or less, and only 10% of Vanguard participants saved the maximum amount allowed under the Internal Revenue Code.

In addition, the analysis found only 14% of eligible participants took advantage of the catch-up contribution feature. The Roth 401(k) feature which became available in 2006 was adopted by 14% of Vanguard plans and 5% of participants within these plans elected the option. Early Roth adopters included new plan enrollees, high savers, Web-registered participants, and high-income households, the Vanguard report said.

In 2006, 91% of Vanguard DC plans provided an employer contribution and 97% of participants were in plans with an employer contribution. The most common employer contribution was a matching contribution, and the most common match was $0.50 on the dollar on the first 6% of pay.

Twelve percent of Vanguard DC plans with employee elective contributions have adopted automatic enrollment and nine in 10 plans with automatic enrollment use a balanced fund as the default fund, according to the report. Six in 10 of those plans use a full autopilot design, including automatic enrollment, automatic savings increases, and a balanced or life-cycle fund as the default investment.

Participant Investing

The average number of plan investment options offered rose to 20 in 2006, up from 13 in 2000, but Vanguard said participants continued to adopt new choices at a slower rate than employers introduced them. Most of the growth in the number of options offered was due to the introduction of life-cycle funds.

Three-quarters of plans offered life-cycle funds in 2006, with 28% of participants in these plans investing in life-cycle funds. However, only 34% of participants in life-cycle funds used them as the intended “one-stop shopping” investment choice, the Vanguard analysis found.

Eleven percent of plans offered company stock as an investment option. About one-quarter of Vanguard plans offering company stock had a concentrated position exceeding 20% of plan assets.

The analysis found, as of 2006, approximately 70% of plan assets and participant contributions were invested in equities showing an appropriate level of risk to support participants’ retirement goals, but Vanguard still found areas of concern.

Thirteen percent of participants had their entire account invested in fixed income securities; 18% held all-equity portfolios; and 14% of all participants had more than 20% of their account balance invested in company stock. In addition, while nearly all participants were offered a U.S. equity index fund, only half used that option.

Plan Activity

The average account balance for Vanguard participants was nearly $76,000 at year-end 2006 and the median was $26,000. One-third of participants had $10,000 or less in their current employer’s DC plan at year-end 2006, while one-fifth had account balances of more than $100,000. Not surprisingly, Vanguard found account balances rose in correlation to participant income, age, and years of service.

As of December 31, 2006, personalized returns for Vanguard DC participants were positive across one-, three-, and five-year periods.

The volume of participant fund transfers was modest during 2006, with 14% of participants making a trade shifting 15% of recordkeeping assets. On a net basis participants shifted assets to fixed income, but that only accounted for 0.3% of average recordkeeping assets.

Vanguard found evidence against the common view that young participants are responsible for the bulk of 401(k) loans, as participants in their 30s, 40s, and early 50s were just as likely in 2006 to take a loan as were participants in their 20s. On average, participants with loans borrowed a modest 12% of their account balance, according to the analysis.

In 2006, only 4% of Vanguard participants in plans providing in-service withdrawals took such a distribution, but about 4 in 10 of them had taken in-service withdrawals in each of the past two years. As for other distributions more than two-thirds of participants leaving their employer during 2006 preserved their assets for retirement.

Vanguard found nine of 10 dollars available for distribution among participants who changed jobs or retired stayed within the retirement system. Nearly half of participants, and more than half of assets, remained within the employer’s plan in 2006 – far more than was distributed in cash or rolled over to an IRA.

The report of the Vanguard analysis is here.