Key findings from Vanguard’s study show that savings rates remain steady and that automatic features helped improve retirement readiness, but beyond the top headlines are some other important benchmarks.
In fact, despite ongoing challenges with the pandemic, inflation reaching the highest point in decades and other economic headwinds, the firm’s metrics in How America Saves reveal that participant retirement plan behaviors remained largely unaffected and, in some areas, continued to improve.
For instance, according to the firm’s analysis of nearly five million 401(k) accounts recordkept at Vanguard, the average deferral rate was 7.3% in 2021, up modestly from 6.9% in 2012. In addition, the median deferral rate was 6.1% in 2021, in line with the past 10 years. Moreover, when including both employee and employer contributions, the average total participant contribution rate in 2021 was 11.2% and the median was 10.4%, up modestly from 10% in 2017.
And while this is a testament to the growing use of automatic solutions and the power of participant inertia, the report suggests participants need to reach a total saving rate of 12% to 15% or more to meet their retirement goals.
Here are some additional findings from the 110-page report.
Participation Rates by Employee Demographics
While participant and contribution rates have improved, participation rates vary considerably by employee demographics, with income being one of the primary determinants—not surprisingly. In this case, the study shows that 45% of eligible employees with income of less than $15,000 contributed to their employer’s DC plan in 2021, while 96% of employees with income of more than $150,000 elected to participate.
Participation rates were lowest for employees younger than 25. Only 56% of those employees made employee-elective deferrals to their employer’s plan in 2021, while more than 8 in 10 eligible employees between ages 35 and 64 made such deferrals. Tenure also had an influence on plan participation. Vanguard found that 68% of eligible employees with less than two years on the job participated in their employer’s plan, while more than 8 in 10 employees with four or more years of tenure were participants.
Meanwhile, men and women appeared to participate at about the same level in 2021, but these overall averages fail to account for income differences. For instance, at all income levels, women were more likely than men to join their employer’s plan. For example, 88% of women earning $50,000 to $74,999 participated in their employer’s plan—compared with 81% of men in the same income group.
Matching Contributions
A wide variation in employer contributions is most evident in the design of employer matching formulas, Vanguard observes. In 2021, the firm administered more than 170 distinct match formulas for plans offering an employer match. Among those plans, 71% (covering 62% of participants) provided a single-tier match formula, such as $0.50 per dollar on the first 6% of pay. Less common, used by 22% of plans (covering 27% of participants), were multitier match formulas, such as $1.00 per dollar on the first 3% of pay and $0.50 per dollar on the next 2% of pay.
Another 5% of plans (covering 9% of participants) had a single- or multitier formula but imposed a maximum dollar cap on the employer contribution, such as $2,000. Finally, a small percentage of plans used a match formula that varied by age, tenure or similar variables.
Advice
To address participant needs for assistance with investing and planning decisions, Vanguard found that plan sponsors are increasingly offering managed account advice services. According to the study, 41% of all Vanguard DC plans offered managed account advice in 2021 and nearly 8 in 10 larger plans offered the service.
What’s more, during the past five years, the percentage of plans offering a managed account advice program has grown by more than 30%, and in turn, the percentage of participants offered the service has grown by a similar amount. As larger plans were more likely to offer advice, three in four participants had access to the service. Vanguard observes that balancing competing goals with retirement saving can be complicated; consequently, supporting participants in creating holistic financial well-being has become a priority for plan sponsors.
Investment Options
The average Vanguard plan offered 27.5 investment options in 2021, which is essentially unchanged from 27.4 investment options in 2020 and 26.6 options in 2012. When each distinct target-date (or target-risk) fund is counted as a single offering, the average number of investment options for 2021 was 17.5. By this measure, sponsors have dropped one investment option on a net basis since 2012—not the one additional option implied by the aggregate number, the study notes.
At the same time, the number of funds used by participants has declined. This is directly attributable to the growth of TDFs. When counting a target-date or target-risk series as a single-fund offering, the median plan sponsor offered 16 investment options in 2021. Only 9% of plans offered more than 25 distinct investment options, while 9% of plans offered 10 or fewer.
Roth 401(k) Adoption
Vanguard notes that it anticipates steady growth in Roth adoption rates, given the feature’s tax diversification benefits. 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. Those who used this feature tended to be younger or higher-income participants. In addition, 25% of plans offered Roth in-plan conversions, but only 4% of participants with access to the option converted assets between 2012 and 2021.
Similarly, after-tax employee elective deferrals were available to participants in 21% of Vanguard plans in 2021. This feature was more likely to be offered by large plans, and one in three participants had access to this feature. Only 10% of employees offered the after-tax deferral feature took advantage of it. Those who used the feature tended to have higher incomes and longer tenures.
While after-tax offerings have remained somewhat stable over the past five years, plans of all sizes have continued to adopt Roth accounts, the study notes. In addition, a third of plans with at least 5,000 participants offered both Roth and after-tax contributions in 2021, up from 26% in 2017.
