Auto this and auto that, whether it’s enrollment, escalation and now portability, have greatly contributed to participation rates, but if you’re looking to quantify just how much of an impact they’ve made, investment behemoth Vanguard has it.
The Pennsylvania-based company, with an eye-popping $4.3 trillion in asset under management, says adoption of retirement plan automatic enrollment, in particular, grew by 300 percent over the last decade. Nearly half of all 401(k) retirement plans now use automatic enrollment.
As a result, plans with automatic enrollment boast a 90 percent participation rate. In contrast, plans with a voluntary enrollment feature had the same participation rate of 63 percent as a decade ago. In aggregate, across all plans, the average participation rate last year was 79 percent, up 16 percent from 2007.
Importantly, the company, adds 97 percent of retirement plan participants received an employer-matching contribution last year. Considering nonmatching contributions as well—which can be structured as variable or fixed profit-sharing contributions, or employee stock ownership plans—94 percent of sponsors offered some sort of employer contribution, benefitting 98 percent of participants in aggregate.
Plan sponsors are also challenging the status quo by raising the default deferral rates of their plans.
“When auto features were first introduced, there seemed to be some hesitancy from plan sponsors to default participants at higher rates, believing it might discourage participation,” Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of “How America Saves,” said in a statement. “Today, more sponsors are embracing higher default rates and, importantly, we found that these higher rates are sticky.”
In the past ten years, plans with default deferral rates of 4 percent or greater have doubled to 48 percent. In addition, plans with a default savings rate of 6 percent or higher have nearly tripled to 20 percent over the past decade.
And two-thirds of automatic enrollment plans have now implemented automatic annual deferral rate increases, which nudge savings rates higher by one to two percentage points each year.
Professionally managed funds improving asset allocation
Through plan design features such as automatic enrollment, plan sponsors are also encouraging better participant investment behaviors. According to Vanguard, nearly all (97 percent) of automatic enrollment plans designate a target-date fund as the default investment strategy.
In 2016, more than half of all Vanguard participants were solely invested in a single professionally managed allocation—typically a TDF. By 2021, Vanguard researchers estimate that figure will jump to about 75 percent.
Extreme allocations and frequent trading are also declining. In large part due to the growing use of TDFs, the fraction of participants investing exclusively in equities has dropped from 17 percent in 2007 to 6 percent in 2016. Vanguard’s research also showed that today’s well-designed plans encourage long-term, disciplined strategies, with less than one in ten participants conducting a trade last year—despite the uncertainty accompanying major market and geopolitical events, such as Brexit and the U.S. presidential election.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
