Vanguard’s comprehensive annual report on defined contribution data, How America Saves 2015, suggests that the main challenges of retirement savings—plan participation, contribution rates, and portfolio…
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diversification—are being met head-on by sponsors through their plan and investment menu design decisions. Vanguard believes that improved plan design will ultimately lead to better outcomes for retirement plan participants.
Plan sponsors have sought to make participation the default, with widespread use of features such as automatic enrollment and automatic deferral increases. At year-end 2014, 36% of Vanguard plans had implemented auto enrollment, a 50% increase since 2009, and 60% of newly hired employees participating in Vanguard 401(k) plans were automatically enrolled. Moreover, although this feature was traditionally used only with newly hired employees, sponsors of half of Vanguard plans have now chosen to apply it to eligible nonparticipants. In addition, seven in ten auto enrollment plans have implemented automatic annual deferral-rate increases.
“The first step in retirement savings is participation,” said Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research. “Over the past decade, we’ve seen a meaningful jump in total participation rates. Three-quarters of eligible workers now participate in their employer’s plan, up from two-thirds ten years ago, underscoring the impact of autopilot plan designs.”
Another positive trend is a marked shift toward optimally designed portfolios for participants. The value of age- and risk-appropriate portfolio construction choices is most prominently reflected in the continued growth of target-date funds, particularly as the default investment option. With 88% of plan sponsors offering target-date funds, nearly all Vanguard participants have access to this professionally managed and diversified investment choice, and 64% take advantage of this option. Last year, $4 of every $10 deposited in Vanguard plans was invested in target-date funds.
According to Vanguard research, target-date funds and other professionally managed allocations have the added benefit of reducing extreme allocations and establishing appropriate risk levels for participants. As of year-end 2014, roughly one in eight employees held an extreme allocation position—8% of participants held only equities, while 5% held no equities in their portfolios. Ten years ago, one in three participants held an extreme allocation position—21% had all-equity portfolios, while 13% held no equities.
In addition to the broad adoption of diversified, balanced investment programs, there has been a dramatic shift away from company stock. Only 8% of participants held a concentrated stock position at the end of 2014, compared with 18% a decade prior—more than a 50% improvement.
With a continued industry focus on plan fees, sponsors have sought to lower the cost of investing, which can make a meaningful difference over time for retirement plan participants. More plan sponsors have incorporated a wider range of low-cost index funds. Half of Vanguard plans now offer an index core lineup, a comprehensive set of low-cost index options that span the global capital markets. Factoring in index-based target-date funds, 82% of participants held equity index investments as of year-end 2014.
Vanguard, with an average asset-weighted expense ratio of 0.14%, continues to be the industry’s low-cost leader1. Vanguard plan sponsors will soon have additional low-cost investment options with the recently announced Vanguard Institutional Target Retirement Fund series. The 12 new funds will be available to Vanguard institutional clients by the end of the second quarter and feature an estimated expense ratio of 0.10%.
Opportunities to move the savings dial
While high-level metrics of savings behaviors—median and average deferral and contribution rates—remained steady in 2014, Vanguard sees encouraging signs with respect to the number of participants saving at double-digit rates. “About half of participants in Vanguard-administered defined contribution plans are saving 10% or more,” said Ms. Young.
However, the report also found that in plans with automatic enrollment, more than 60% enroll at default rates of 3% or less. Auto enrollment boosts participation rates, but it can lead to lower contribution rates when default deferral rates are set at those levels. Vanguard recommends a target savings rate of 12%–15%, including employer match.
“Plan sponsors are playing a more assertive role in shaping participant outcomes, and we commend them for their diligent efforts in designing, overseeing, and continually improving their plans,” said Martha King, the newly announced head of Vanguard’s Institutional Investor Group. “At the same time, we share with our sponsor clients an obligation to move the dial on savings rates, and give participants the best chance for investment success.”
Published annually since 2000, How America Saves has become a premier source of defined contribution data and serves as a resource to Vanguard plan sponsor clients and the industry at large as a plan benchmarking tool. “We can leverage this wealth of data in our partnership with sponsors to address opportunity areas for their own plans and how they can better address participant needs,” said Ms. King.
Investments in Vanguard Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
Source: ETFWorld.com
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