11 New Findings on How 5 Million Americans Are Saving for Retirement: Vanguard
From: www.thinkadvisor.com
Vanguard on Tuesday released the latest edition of How America Saves, its report on 401(k) plan design and retirement savings habits.
Based on an examination of retirement plan data from 5 million defined contribution plan participants across Vanguard’s recordkeeping business, the report found that 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, John James, managing director of Vanguard Institutional Investor Group, said in a statement.
“However, workers’ needs are evolving and so too should plan design. 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.”
See these 11 key findings from Vanguard’s How America Saves report.
1. Adoption of auto-enrollment continues to trend upward.
Adoption of automatic enrollment has more than tripled since year-end 2007, to 56% of Vanguard plans at year-end 2021, including 75% of plans with at least 1,000 participants. Last year, 70% of participants were in plans with an auto-enrollment option.
Two-thirds of auto-enrollment plans have implemented automatic annual deferral rate increases, with 58% of plans now defaulting employees at a deferral rate of 4% or higher, compared with 32% of plans in 2012.
Ninety-nine percent of all plans with automatic enrollment defaulted participants into a balanced investment strategy in 2021; 98% chose a target date fund as the default.
2. Most savers use professionally managed allocations.
Participants with professionally managed allocations have their entire account balance invested in a single target-date or balanced fund or in a managed account advisory service. These professionally managed investment portfolios significantly improve diversification compared with the portfolios of participants who make their own choices, according to Vanguard.
At year-end 2021, 64% of all Vanguard participants were solely invested in an automatic investment program, up from 7% in 2004 and 36% in 2012. Fifty-six percent of all participants were invested in a single target-date fund, 1% held one other balanced fund and 7% used a managed account program.
3. Target date funds are ubiquitous.
Ninety-five percent of plans offered target-date funds at year-end 2021, up 11 percentage points from 2012. Nearly all Vanguard participants were in plans that offer TDFs. Eighty-one percent of participants used the funds, and 69% who own them had their entire account invested in a single TDF.
Vanguard noted that the qualified default investment alternative regulations, promulgated under the 2006 Pension Protection Act, continue to drive adoption of target date funds. Even so, around 40% of single target-date investors choose the funds on their own, rather than through default.
4. Voluntary enrollment rates lag.
Plans with automatic enrollment had a 93% participation rate, compared with 66% for plans with voluntary enrollment.
The average employee-elective deferral rate was 7.3% in 2021, up from 6.9% in 2012. The median deferral rate was 6.1% in 2021, in line with the past 10 years. Most Vanguard plans also make employer contributions. Employee and employer contributions combined, the average total participant contribution rate in 2021 was 11.2%, and the median was 10.4%. With non-participants included, employees hired under automatic enrollment plans saved an average of 10.9%, considering both employee and employer contributions. Employees hired under a voluntary enrollment design saved an average of 7.3%, owing to significantly lower participation.
5. Roth 401(k) adoption holds steady.
At year-end 2021, 77% of Vanguard plans had adopted the Roth feature, and 15% of participants within these plans had elected the option. Vanguard said it anticipates steady growth in Roth adoption rates, given the feature’s tax diversification benefits.
6. Account balances are up 10%.
In 2021, Vanguard participants’ average account balance was $141,542, up 10% since 2020, driven primarily by the increase in equity markets over the year. The median balance in 2021 was $35,345.
7. Participant portfolios are becoming more balanced.
Participant portfolio construction has improved significantly over the past 15 years, with 78% of participants having a balanced strategy in 2021, compared with 39% in 2005.
In 2021, only 3% of participants held no equities, and just 3% had more than 20% allocated toward company stock. This compares with 2005, when 13% of participants had no equities and 18% of participants held a concentration in company stock.
8. Trading has declined.
During 2021, 8% of DC plan participants traded within their accounts, while 92% did not. On a net basis, there was a shift of 3% of assets to fixed income during the year, with most traders making small changes to their portfolios.
Vanguard said participant trading over the past 15 years has trended downward. It attributed this in part to participants’ increased adoption of target date funds. Only 3% of participants holding a single TDF traded in 2021.
9. Loan activity remains muted.
Loan use increased slightly year over year in 2021 but remained below the typical usage rates of years prior to the pandemic. Thirteen percent of participants had a loan outstanding in 2021, compared with 16% in 2016. The average loan amount was about $10,600.
10. Plan withdrawals dropped to pre-pandemic levels.
In-service withdrawal activity decreased in 2021 from a year earlier. Vanguard said this was expected as access to assets through coronavirus-related distributions ended at the end of 2020. Both traditional hardship and non-hardship withdrawals trended similarly to pre-pandemic levels in 2021.
11. Participants opted for rollovers in lieu of distributions.
During 2021, about a quarter of all participants could have taken a distribution because they had separated from service in the current year or prior years. However, 83% 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, only 2% of all plan assets available for distribution were taken in cash, with the remaining 98% preserved. Plan sponsors are continually looking for ways to help retirees within the plan, Vanguard said. In 2021, 64% of plans allowed retirees to take installments, and 37% allowed for partial withdrawals.
