As many workers face a variety of financial uncertainties, an update to Vanguard’s 2020 “How America Saves” study finds that their overall behavior in retirement plans has not wavered.
Both participation and deferral rates held steady during the first four months of 2020, and two-thirds of contributing participants saw their account balances rise, the firm notes in its update.
From January through April 2020, 7.2% of participants increased their payroll deferral percentage, while only 6.9% decreased their deferral rate. Vanguard notes that this data excludes participants who had their deferral percentage automatically increased through an autopilot design.
In addition, the research found that for the 12 months ended April 30, 2020, median account balances of continuous participants—those with an account balance in both April 2019 and April 2020—increased by 5%, while average total returns dropped 1.6%.
Because of ongoing contributions, account balances will appear to be “less negatively impacted” during falling markets, the report explains. “This ‘contribution effect’ may mask the psychological impact of falling stock prices on participants,” it states. In addition, the report notes that, while equity markets decreased during the first four months of 2020, domestic bond markets were positive and helped offset negative equity returns for well-diversified participants.
The 2020 edition of “How America Saves” was based on 2019 data from approximately 1,800 qualified plans and 5 million DC plan participants across the firm’s recordkeeping business. But considering the first quarter volatility, Vanguard has now released the supplemental update examining plan design and participant behavior during the first four months of 2020.
Stay the Course
The update notes that automatic plan features and professionally managed allocations helped nearly 95% of participants stay the course. Less than 2% of target-date investors traded during the recent market volatility, a rate five times lower than other Vanguard investors.
Participants’ portfolio allocations remained consistent throughout the market turmoil. Only 5.3% of DC participants traded between Jan. 2020 and April 2020. In addition, less than 1% of participants abandoned equities through a trade. Vanguard notes that this is partially attributed to participants’ increasing adoption of TDFs and other professionally managed solutions.
Loan issuances declined through April 2020, as did both hardship and nonhardship withdrawals, the report further observes. And while a small percentage of participants accessed their retirement savings through the CARES Act—which eased retirement plan distribution and loan rules for those impacted by COVID-19—most participants have not accessed their retirement plans.
“Participants remained unflappable and focused throughout the recent market volatility,” Martha King, managing director and head of Vanguard Institutional Investor Group, noted in a statement.
Underscoring the long-term importance of continued participation in 401(k) plans, the median account balance increased 71% among participants with a 401(k) account between April 2015 and April 2020.
Ongoing Trends
The firm notes that, while market and economic conditions look much different in 2020 than they did last year, the data reveals trends they expect will continue. For example, 50% of plans are now using automatic enrollment, more than triple the percentage in 2007.
The average total saving rate—which combines employee and employer contribution rates—is 56% higher in plans with automatic enrollment compared with plans where enrollment is voluntary. And participant use of managed allocations—including TDF and managed account advisory services—rose to 62% in 2019.
Other key findings from the 2020 edition of How America Saves include:
- Target Date Funds: 94% of plan sponsors offered TDFs at year-end 2019, up from 79% of plans in 2010. In addition, 78% of all participants recordkept by Vanguard use TDFs, and two-thirds of participants owning TDFs have their entire account invested in a single TDF.
- Participation rate: The estimated plan-weighted participation rate was 83%, up from 76% in 2010. Plans with automatic enrollment registered a 92% participation rate, compared with just 61% for plans with voluntary enrollment.
- Deferral rates: The average deferral rate was 7% in 2019, essentially the same as it was in 2010. The median deferral rate was 6% in 2019; Vanguard notes that this has remain unchanged for as long as the firm has been tracking this metric. Including both employee and employer contributions, the average total participant contribution rate in 2019 was 10.7% and the median was 10%, which have remained stable for the past 15 years, the report notes.
- Default rates: Currently, 55% of automatic enrollment plans start participants at a savings rate of 4% or higher, with 24% of plans selecting a default savings rate of 6% or higher. Vanguard’s research also indicates that enrolling participants at higher default rates have no impact on individuals opting out of 401(k) plans.
- Roth 401(k) adoption: At year-end 2019, the Roth feature was adopted by 74% of Vanguard plans, and 12% of participants within these plans had elected the option.
- Company stock: Among plans offering company stock, the percentage of participants holding a concentrated position of more than 20% of their account balance continued its fall from 31% in 2010 to 15% in 2019. In addition, the number of plans offering company stock to participants continued to decline from 11% in 2010 to 8% in 2019.
