An early preview of Vanguard’s How America Saves 2024 finds that plan sponsors are continuing to make improvements to their plan designs.
The report reveals that 60% of plans with an automatic enrollment design defaulted their employees into the plan at a rate of 4% or higher—which is a new record high and a trend that has continued to increase every year. What’s more, nearly 7 in 10 plans automatically enrolled employees into an annual escalation feature that increased their deferral percentage.
The full report, which examines retirement plan data from nearly 5 million defined contribution (DC) plan participants across the firm’s recordkeeping business, will be available in June.
Overall, as of year-end 2023, 59% of Vanguard plans permitting employee-elective deferrals had adopted an automatic enrollment design; this is nearly double the number of plans (34%) that did so a decade ago in 2013. Not surprisingly, larger plans—with at least 1,000 participants—were more likely to implement automatic enrollment, with 77% of these plans using the feature.
Additional highlights show that 15% of participants increased their payroll deferral percentage during 2023, while 8% decreased their deferral rate. An additional 28% of participants had their deferral percentage increased from an annual automatic increase, leading to 43% of participants increasing their savings, which Vanguard notes is an all-time high since they began tracking this metric in 2019.
Participant Activity
Participant trading or the movement of existing account assets from one plan investment option to another apparently was also at an all-time low—even amidst a volatile market environment. When participants in a managed account program are excluded, only 5% of participants initiated an exchange in 2023. This is compared to 10% in 2014 and 20% in 2004—years with even less market volatility.
The proportion of participants in professionally managed allocations remained strong at 66%, the report further notes. Here, Vanguard observes that participants who are pure TDF investors benefit not only from age-appropriate equity allocations and continuous rebalancing but also are far less likely to trade compared with other investors. Typically, pure target-date investors are four to five times less likely to trade than other investors, the report explains.
At the same time, however, loan issuances increased by 12% in 2023, compared with the previous year, although it remains below pre-pandemic levels and is about 10% below the loan initiation rate of six years ago.
Hardship withdrawals also increased modestly from the previous year, perhaps signaling that some households were facing financial stress, the report further notes. Throughout 2023, 3.6% of participants initiated a hardship withdrawal, up from 2.8% in 2022. That said, Vanguard also emphasizes that more than 96% of participants didn't take a hardship withdrawal.
“Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase isn't surprising,” the Vanguard researchers note. Moreover, for a small subset of workers facing financial stress, hardship withdrawals may serve as a safety net that otherwise may not have been available without plan-implemented automatic solutions, they further emphasize.
The preview to Vanguard’s How America Saves 2024 can be found here.
