So, it’s not all market appreciation after all.
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.
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.
- 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).
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,” Jean Young, lead author of How America Saves and senior research associate with Vanguard Center for Investor Research (CIR), said in a statement. “The trend toward preserving retirement savings upon separation of service is especially encouraging, as it shows participants are thinking long-term.”
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.