The average 401(k) balance in Vanguard plans, a major bellwether of the defined contribution industry overall, climbed to a new record of $102,682, according to a new report from the Pennsylvania-based investment behemoth.
The reason? Retirement plan sponsors continue to evolve the defined contribution model by adopting best practices of convenience, construction, and costs in plans, the company found. It’s report, titled How America Saves 2015, suggests that the main challenges of retirement savings—plan participation, contribution rates, and portfolio 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, Vanguard notes. 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,” Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research, said in a statement. “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.
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.
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.”
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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.
