401k participants in plans recordkept by Vanguard saved an all-time high 7.3% of their income, on average, in their employer’s plan in 2021, according to just-released data from “How America Saves,” the firm’s seminal report on 401k plan design and retirement savings habits.
Vanguard says this can partly be attributed to the fact that 58% of 401k plans now default at rates of 4% or higher—the continuation of an upward trend. In 2012, only 32% of plans defaulted at rates of 4% or higher.
“We believe it’s critical to maintain this momentum by increasing the initial default and marrying it to an automatic escalation feature,” Vanguard states in the report.
Thanks to automatic deferrals and increases, the median total contribution rate—which includes both participant and employer contributions—stood at 10.4% in 2021, up modestly from 10% in 2017. However, roughly half of all participants continue to save below the recommended savings rate of 12-15% of their salary. Vanguard research shows minor deferral increases could help close this savings gap, as one-fifth of participants saving below these levels are just 1-3% away from their target savings rate.
Also of note, the report found deferral rates for automatically enrolled participants (7.3%) have effectively converged with the average deferral rate for participants who voluntarily enrolled (7.4%). Historically, voluntarily enrolled participants contributed at higher rates. This convergence suggests that automatically enrolled participants may be amenable to higher default deferral rates upon enrollment in the plan.
Through its annual, comprehensive analysis of nearly five million 401k accounts recordkept at Vanguard, the report reveals additional plan design opportunities employers can address to further improve workers’ retirement readiness.
While employers have made significant progress in adopting leading plan designs and features, many participants are facing increasingly complex financial situations and life events that can compromise their retirement savings efforts.
“There is no doubt that plan sponsors’ efforts over the last two decades have helped improve the retirement readiness of millions of Americans. However, workers’ needs are evolving and so too should plan design,” said John James, managing director and head of Vanguard Institutional Investor Group. “Plan sponsors are uniquely positioned to support their employees’ financial well-being with integrated tools, advice, and services that can help improve their overall financial peace of mind.”
More key findings
• Account balances: In 2021, the average account balance for Vanguard 401k participants was $141,542; the median balance was $35,345. Vanguard participants’ average account balances increased by 10% since 2020, driven primarily by the increase in equity markets over the year.
• Roth 401k adoption: At year-end 2021, the Roth feature was adopted by 77% of Vanguard plans, and 15% of participants within these plans had elected the option. The report said Vanguard anticipates steady growth in Roth adoption rates, given the feature’s tax diversification benefits.
• Growth of automatic savings features: The adoption of automatic enrollment has more than tripled since year-end 2007, the first year after the Pension Protection Act (PPA) of 2006 took effect. At year-end 2021, 56% of Vanguard plans had adopted automatic enrollment, including 75% of plans with at least 1,000 participants. In 2021, 70% of participants were in plans with an automatic enrollment option.
Two-thirds of automatic enrollment plans have implemented automatic annual deferral rate increases. Additionally, automatic enrollment defaults have increased over the past decade.
Ninety-nine percent of all plans with automatic enrollment defaulted participants into a balanced investment strategy in 2021—with 98% choosing a target-date fund as the default.
• Professionally managed portfolios: They vastly improve portfolio construction but are less popular with older participants. Target-date funds and other professionally managed allocations have reduced frequent trading and extreme equity allocations among participants by three-quarters since 2006. Yet, more than half of participants over age 55 remain do-it-yourself investors, leaving some savers vulnerable to significant portfolio volatility. Professionally managed solutions can help diversify older investors’ holdings and right-size their risk.
At year-end 2021, 64% of all Vanguard participants were solely invested in an automatic investment program—compared with 7% at the end of 2004 and 36% at year-end 2012. Fifty-six percent of all participants were invested in a single target-date fund; another 1% held one other balanced fund; and 7% used a managed account program. These diversified, professionally managed investment portfolios dramatically improve diversification compared with the portfolios of participants who make their own choices.
• Cashouts disproportionately impact younger, low-balance participants: Most participants with 401k balances of less than $1,000 voluntarily or are automatically cashed out of their retirement savings when they leave an employer, compared to just 7% of participants with balances over $100,000. Participants who prematurely cash out their retirement savings risk immediate tax consequences and may forfeit future savings and returns if assets are not reinvested in a tax-sheltered account. Auto portability services and revisions to minimum balance rules can help decrease cash out rates.
• Participants are changing jobs more frequently and may risk retirement savings interruptions:Nearly one-third of plan sponsors require employees to work at the company for a period before they are eligible to contribute to their retirement plan. To help ensure participants’ savings efforts continue unabated throughout their career, the Vanguard report says plan sponsors should consider adopting plan design features, such as higher default rates, immediate eligibility and vesting, and integrated financial well-being services.
Access the How America Saves report here.
SEE ALSO:
• Self-Directed 401k Balances Down in Q1: Schwab Report
• 401k Savers ‘Stay the Course’ Despite Market Volatility