The continued growth in participants’ adoption of professionally managed allocations is leading to dramatic improvements in diversification of investment portfolios, Vanguard says in a newly released report, How America Saves 2017.
Professionally managed investment options have the potential to reshape retirement savings outcomes for participants. The study shows that plan sponsors are increasingly using automatic enrollment and automatic escalation, along with target-date funds as default investment options, in continuing to focus on retirement readiness for employees. It also suggest a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.
At year-end 2016, more than half of all Vanguard participants were solely invested in an automatic investment program, compared with just 17% at year-end 2007. Among new plan entrants (participants entering for the first time in 2016), 85% were solely invested in a professionally managed allocation.
In addition, the report shows that 9 in 10 Vanguard plan sponsor clients offered target-date funds at year-end 2016, up more than 50% from year-end 2007. Vanguard researchers further predict that by 2021, 75% of its participants will be solely invested in an automatic investment program.
The report further emphasizes that plan design features, such as automatic enrollment, are also encouraging better participant investment behaviors. Nearly half of Vanguard’s plans use automatic enrollment, representing 300% growth of this feature over the past 10 years. As a result, Vanguard plans with automatic enrollment have a 90% participation rate, according to the report. In aggregate, across all plans in the study, the average participation rate in 2016 was 79%, up 16% from 2007.
Extreme allocations and frequent trading are also declining in Vanguard’s plans, according to the findings. Largely due to the growing use of target-date funds, the segment of participants investing exclusively in equities dropped from 17% in 2007 to 6% in 2016. Vanguard’s research also suggests that well-designed plans are encouraging long-term, disciplined strategies, with fewer than 1 in 10 participants conducting a trade last year, despite the uncertainty accompanying major market and geopolitical events.
