Just How Well are DC Plan Participants Saving?

Vanguard participant savings rate

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Seven in 10 defined contribution plan participants in 401k plans recordkept by Vanguard are saving at rates that would enable them to attain a 65% income replacement rate in retirement, but a modest increase in participant elective deferral rates of 1, 2, or 3 percentage points would enable 7 in 10 plan participants to attain a 75% replacement rate in retirement.

Most studies suggest aiming for a target between 70% and 85% of pre-retirement income to maintain a participant’s lifestyle in retirement. Saving rates include both the employee elective contributions and any employer contributions.

For comparison, more than half (53%) of 401k participants at John Hancock Retirement are positioned to replace at least 70% of their current income in their retirement years, according to the John Hancock’s 2022 State of the Participant report released in June.

Vanguard recently released new research that assessed whether defined contribution plan participants are saving optimally in their current workplace retirement plan.

The analysis includes approximately 1.9 million eligible employees and 1.5 million actively contributing participants in approximately 880 plans for which the company has completed compliance testing as of December 2020.

The research found one-half of Vanguard plan participants are saving at or above their income-based target saving rates and are saving effectively. When all employees eligible to participate in the plan were analyzed, including those who choose not to, the rate drops to 40%.

Not surprisingly, plans with automatic enrollment tend to have higher rates of participants saving effectively. Across all eligible employees in plans with automatic enrollment, employees are 70% more likely to be saving effectively (45%, compared with 26% in plans without automatic enrollment), primarily because of the significant difference in participation between employees in the two plan designs. Plan size did not affect the results.

The research also ran regressions to elicit what plan design features and demographic variables are correlated with saving effectively. Plan design—namely, automatic enrollment—and the generosity of employer contributions predict saving effectively. An automatic enrollment default of 6% or higher was a strong predictor of participants saving effectively.

Four in 10 participants are enrolled in automatic annual saving rate escalation and will automatically see their saving rates rise. When taking into account the impact of automatic escalation in the original 75% replacement ratio scenario, an additional 20% of participants will reach their target saving rate, resulting in nearly 7 in 10 Vanguard plan participants saving effectively.

See the complete Vanguard Participant Saving Rate Index here.

SEE ALSO:

• Vanguard Activates Robo Advisor for Retirement Plan Participants

• Over Half of 401k Participants Pacing to Be ‘Retirement Ready’

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