Score one for the “auto” revolution.
Automatic plan features helped millions of 401k participants adhere to their financial goals, even amid severe market volatility resulting from the coronavirus pandemic, according to Vanguard’s 2020 edition of How America Saves.
The investment behemoth, with $1.3 trillion in DC assets under management as of March 31, also surveyed its 5 million participants about their behavior during the pandemic, the results of which were encouraging, to say the least.
“Participants remained unflappable and focused throughout the recent market volatility,” Martha King, managing director and head of Vanguard Institutional Investor Group, said in a statement. “This tremendous display of discipline in the wake of uncertainty is a testament to the effectiveness of world-class plan design championed by Vanguard and our plan sponsor partners.”
Automatic plan features
Over the last two decades, innovations in default investment options, automatic enrollment and savings rates drove higher participation and savings rates, along with declines in extreme allocations and reactive trading behavior.
Drawing from its defined contribution data, Vanguard found that prudent plan design can help withstand a host of market conditions.
Key findings from How America Saves include:
- Target-date funds reduce extreme allocations: Since 2006, increasing adoption of target-date funds reduced participants’ extreme portfolio allocations by three-quarters. As a result, more participants are invested in enduring, risk-appropriate investment solutions.
- Automatic enrollment leads to greater employee participation and higher savings: Automatically enrolled employees are about 30% more likely to participate in their employer’s plan than employees hired under a voluntary enrollment design.
- Employee total savings rates—inclusive of both participant and employer contributions—for automatically enrolled plans average 10.3%, compared to 6.6% for voluntary enrollment plans.
- Higher default rates can bridge the savings gap: In 2019, automatically enrolled participants’ deferral rates were equal to participants in voluntary enrollment plans. This indicates that automatic annual increases and higher default deferral rates can help participants in automatic enrollment plans save more.
- Vanguard’s research also indicated that enrolling participants at higher default rates have no impact on individuals opting out of 401k plans. Currently, 55% of automatic enrollment plans start participants at a savings rate of 4% or higher, with 24% of plans selecting a default savings rate of 6% or higher.
Participant behavior in the pandemic
Automatic plan features and professionally managed allocations helped nearly 95% of participants stay the course during financial uncertainty.
Among the highlights:
- Target-date fund investors were less apt to react to pronounced market swings: Less than 2% of target-date investors traded during the recent market volatility, a rate five times lower than other Vanguard investors.
- Participants’ portfolio allocations remained consistent throughout the market turmoil: Less than 1% of participants abandoned equities through a trade. This is partially attributed to participants’ increasing adoption of target-date funds and other professionally managed solutions.
- Participants continued to save for their long-term retirement goals: Both participant and deferral rates held steady during the first four months of 2020, and two-thirds of contributing participants saw their account balances rise. Underscoring the long-term importance of continued participation in 401k plans, the median account balance increased 71% among participants with a 401k account between April 2015 and April 2020.
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.
