The retirement outlook for individuals covered by employer-sponsored retirement plans is increasingly bright due to employers driving enhancements to plan design and participants adopting prudent investing practices, according to a newly issued report from Vanguard.
How America Saves 2019—Vanguard’s annual bellwether report on retirement savings in corporate retirement plans—finds that the increased adoption of automatic savings features has helped more plan employees save at near optimal levels and save more effectively. Vanguard reported the following:
- The adoption of automatic enrollment has tripled since year-end 2007. At year-end 2018, 48% of Vanguard plans had adopted automatic enrollment and 66% of new plan entrants were enrolled via automatic enrollment.
- Auto features are encouraging consistent savings. Including both employee and employer contributions, the average 15-year total participant contribution rate in 2018 was 10.6% and the median was 9.8%. Two-thirds of auto enrollment plans have implemented automatic deferral rate increases.
- At year-end 2018, 52% of all participants were invested in a single target-date fund; another 3% held one other balanced fund; and 4% used a managed account program. These diversified, professionally managed investment portfolios dramatically improve portfolio diversification compared to participants making choices on their own.
- Extreme allocations have fallen in recent years as a result of the rise of target-date funds and other professionally managed allocations. Only one in 10 participants have taken an extreme position, holding either 100% in equities (6% of participants) or no equities (3% of participants).
“Our research, including How America Saves, has shown plan sponsors have a continued commitment to improving plan design for participants, which has led to positive results—increased participation, savings rates, and improved portfolio construction. Moreover, the greater adoption of target-date funds signals a shift in responsibility as participants’ investment decision-making is increasingly moving toward employer-selected investment and advice programs,” said Martha King, managing director of Vanguard’s Institutional Investor Group. “We are actively using this research and other participant data to better understand the individual behind every financial decision in order to drive better retirement outcomes.”
Plan Participants Improving Savings Behavior
Plan participants are showing increasing signs of improving their savings behavior. Among the highlights:
- Despite volatile U.S. equity markets in 2018, trading was muted, with only 8% of participants making one or more portfolio trades or exchanges during the year.
- Among plans offering company stock, there has been a move away from concentrated holdings—defined as participants holding more than 20% of their account balance in company stock. The number of participants holding a concentrated position fell to 19% in 2018, a considerable drop from 30% in 2009.
- More individuals are taking steps to preserve their assets for retirement. During 2018, about one-third of all participants could have taken their account as a distribution due to a separation of service in the current year or prior years. The majority of these participants (81%) continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 96% of all plan assets available for distribution were preserved and only 4% were taken in cash.
“Plan design is undoubtedly the first and most powerful tool to drive improved savings behavior, but it is all the more promising to see participants taking positive steps on their own to secure their financial future,” said Jean Young, lead author of How America Saves and senior research associate with Vanguard Center for Investor Research (CIR). “The trend toward preserving retirement savings upon separation of service is especially encouraging, as it shows participants are thinking long-term.”
Vanguard Employing Expertise, Experience, Technology, and Research to Drive Investor Success
Vanguard has been a proponent of auto-plan design features and has a long history of collaborating with plan sponsors to help participants build lasting financial security. In 2003, Vanguard introduced the “One Step” program, which automatically enrolled employees in their 401(k) and increased their annual contributions. The program was announced following the successful implementation of the firm’s Save More Tomorrow plan designed by noted behavioral finance researchers Richard Thaler and Shlomo Bernartzi.
Vanguard has continued innovating with plan design and participant experience, leveraging plan data, behavioral research, and technology to improve retirement readiness. Today, experts in Vanguard Strategic Retirement Consulting (SRC) help defined contribution (DC) plan sponsors optimize their plan design, develop fiduciary best practices, ensure regulatory compliance, as well as share insights on investor behavior and collaborate on strategic communications. The SRC team, which includes attorneys, actuaries, and certified benefit plan professionals with broad industry experience—supported by experts in behavioral finance, participant behavior and communication strategy—assists thousands of plan sponsors each year, employing proprietary tools, such as the Vanguard Plan Effectiveness Index and Plan Design Cost Estimator, to facilitate sufficient participant savings for retirement.
The SRC team also developed the Vanguard Plan Assessment for Retirement Readiness, which provides plan sponsors with a comprehensive analysis that points to whether employees are likely to have the replacement income they need in retirement. The assessment complements Vanguard’s enhanced participant web portal, introduced in 2017, and incorporates a personalized and interactive retirement readiness indicator. The participant-facing Retirement Readiness Tool leverages advanced analytical technology, data, and Vanguard’s Capital Markets Model to provide savers with a holistic snapshot of income in retirement, along with nudges to encourage improved savings behavior. Since its launch, more than 1.3 million participants have viewed the digital Retirement Readiness Tool and more than 550,000 participants have received personalized retirement readiness messages, resulting in more than 70,000 taking action to increase their savings rate. Together, the sponsor and participant retirement readiness tools serve as a powerful combination to address savings sufficiency.
“Our partnership and collaboration with sponsors is critical to enhancing the financial well-being of millions of participants,” said Ms. King. “Continued efforts and investment in digital tools, advanced analytics, and thought leadership will be paramount, but the journey doesn’t stop there. We will be announcing several initiatives over the coming year that will reimagine our retirement offer in the digital age.”