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Plan Design, Participant Behavior Spark Improved Retirement Outlook

Industry Trends and Research

An annual bellwether report on corporate retirement plans finds that the retirement readiness for participants in those plans is brighter due to plan design enhancements and adoption of prudent investing practices. 

In fact, the usage of automatic enrollment has tripled since year-end 2007 and has helped more plan employees save more effectively and at near optimal levels, according to Vanguard’s How America Saves 2019 report.

At year-end 2018, 48% of Vanguard plans had adopted automatic enrollment. And because larger plans were more likely to offer automatic enrollment, 66% of new plan entrants were enrolled via automatic enrollment. 

Slightly more than 60% of all contributing participants in 2018 were in plans with automatic enrollment. And while initially applied only to new hires, automatic enrollment has now been applied to eligible nonparticipants in half of Vanguard plans with the feature, the report notes. 

Moreover, two-thirds of auto-enrollment plans have implemented automatic annual deferral rate increases. Vanguard notes that in 2018 automatic increases narrowed the spread between deferral rates for participants in voluntary enrollment plans and auto-enrollment plans, to 0.4 percentage points. (Participants in voluntary plans had a deferral rate of 7.1%, and participants in automatic plans had a deferral rate of 6.7%.) During the past 10 years, this spread has ranged from zero in 2016 to 2.3 percentage points in 2010, the report further shows.  

The average 15-year total participant contribution rate in 2018 was 10.6% and the median was 9.8%; these figures include both employee and employer contributions. In addition, two-thirds of auto enrollment plans have implemented automatic deferral rate increases.

Participant Behavior

Plan participants are showing increasing signs of improving their savings behavior, according to the findings. Despite volatile U.S. equity markets in 2018, trading was muted, with only 8% of participants making one or more portfolio trades or exchanges during the year. 

Moreover, among plans offering company stock, there has been a move away from concentrated holdings, with the number of participants holding a concentrated position falling to 19% in 2018, compared to 30% in 2009. For purposes of the report, “concentrated holdings” is defined as participants holding more than 20% of their account balance in company stock.

More individuals are taking steps to preserve their assets for retirement. During 2018, about one-third of all participants could have taken their account as a distribution due to a separation of service in either the current year or prior years. Yet, 81% of these participants continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 96% of all plan assets available for distribution were preserved, and only 4% were taken in cash. 

“Plan design is undoubtedly the first and most powerful tool to drive improved savings behavior, but it is all the more promising to see participants taking positive steps on their own to secure their financial future,” notes Jean Young, senior research associate with Vanguard Center for Investor Research and lead author of How America Saves. “The trend toward preserving retirement savings upon separation of service is especially encouraging, as it shows participants are thinking long-term,” Young observes.