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​Moving Beyond Auto-enrollment to Boost Retirement Savings

DC Plan Design

As a follow-up to its June 2021 How America Saves study, a supplementary report by Vanguard offers four key themes and recommended plan actions that can improve participant outcomes. 

Vanguard Strategic Retirement Consulting’s Insights to Action report explains that increased adoption of target-date funds, automatic plan design features and advice solutions are among the reasons employee saving rates are rising. At the same time, plan sponsors are increasingly adopting plan design features that can help participants spend wisely in retirement.  

Digging deeper into these trends, the firm sees continued growth for automatic solutions, and as such, encourages plan sponsors to focus on implementing automatic features, consider an advice solution, adopt retiree-friendly policies and curtail frequent loans and withdrawals. 

Automatic Solutions

Incorporating automatic retirement plan features beyond automatic enrollment—already used by most plans—can help increase the likelihood participants will achieve retirement saving success. To that end, the firm suggests: 

  • implementing automatic enrollment with automatic annual increases; 
  • defaulting participants at 6%, or at least to the employer match; and 
  • performing reenrollment, undersaver and automatic increase sweeps.

Vanguard notes that as of year-end 2020, 57% of its plans were defaulting employees at rates of 4% or higher, up from 43% five years ago. When it comes to retirement saving efficiency, the firm’s research reveals that opt-out rates for employees remained the same at 3% and 6%, suggesting that increasing the default should not raise concerns that participation could decrease. 

Moreover, the firm’s research shows that participants enrolled in a plan with auto-escalation save, on average, 20% to 30% more after three years in the plan, compared with participants in an automatic enrollment plan that does not automatically increase participant contributions.

Participant Advice

To deliver value in both “calm and troubled waters,” the report suggests that plans consider an advice solution to help participants find retirement saving and spending success—regardless of market conditions—through portfolio, financial and emotional value. Vanguard observes that investing is an “emotionally charged activity” that can lead people to act in ways not in their best self-interest, but through careful behavioral coaching, advice can help retirees remain focused on their long-term plans, even when markets turn volatile. 

To demonstrate the importance of behavioral coaching, Vanguard notes that it developed an estimate to measure the value of emotional elements such as trusting or personally connecting with an advisor. Based on a survey of more than 500 investors in the firm’s advice service for individual investors, emotional outcomes account for 45% of total perceived value, while 55% of value is associated with functional aspects of the relationship, such as portfolio management, financial planning and other services.

Moreover, the research found that by using managed account advice, 7 in 10 participants increased their projected 10-year retirement wealth by an average of 23%, net of investment and advice fees. Vanguard notes that this increase can be attributed to higher expected returns due to increased equity exposure and, for a subset, increased saving rates, the report notes. At the same time, managed account advice eliminated extreme equity allocations and improved international and fixed income diversification, the report notes.  

Retiree-friendly Plans

With Baby Boomers retiring at a rate of 10,000 a day through 2029 and many looking for guidance, the report suggests that “retiree friendly” plans can shield participants from the pitfalls of going it alone and can give them a better chance of success in retirement. “This means ensuring the plan doesn’t force participants out at a certain age, allows installments, and permits flexible withdrawals for those participants who would otherwise need to take all of their money out of the plan,” the report states. To make sure participants have the tools to spend wisely in retirement, the Vanguard researchers suggest that sponsors should ensure the plan’s fund lineup supports retiree goals, provides spending guidance with simple implementation and offers advice services.

Moreover, plan sponsors considering investment options should keep in mind that retirement income can’t be solved with a one-size-fits-all solution, the firm emphasizes. “Instead, we believe a better approach is an inclusive range of products, cutting-edge research, and advice provided through a fully integrated client experience that supports the complete scope of financial well-being for participants,” the report states. 

The Vanguard researchers anticipate seeing things such as the continued development of target-date funds for do-it-yourself participants that provide additional equity landing points that coincide with different retirement spending objectives. The firm believes that advances in technology will also continue to expand the availability of advice.

Loans and Withdrawals

Finally, while noting that accessing retirement funds should be a last resort, the Vanguard researchers suggest that plan sponsors should consider reasonable plan rules that balance the needs of participants facing financial emergencies with the goal of preserving plan assets for retirement. The report suggests: 

  • limiting participants to one loan outstanding at a time;
  • considering plan savings sweeps to help participants who may have accessed assets in 2020;
  • setting minimum limits for hardship withdrawals;
  • restricting withdrawal frequency to twice per year; and 
  • setting a “cooling off” period of 30 days to six months between loan payoffs and taking a new loan.