In a nod to plan sponsors that improved plan design and introduced new automatic features despite a volatile economy, Vanguard reveals in its just-released How America Saves report that it saw record highs in participation, deferral rates, and the use of professionally managed allocations in 2022.
In its annual deep dive into the saving behaviors of nearly 5 million DC plan participants across Vanguard’s business, the 22nd edition of the report found that, not only are more Americans than ever saving for retirement (83%)—since 2013, this measure has increased by 8 percentage points—but their behaviors remained resilient amid market volatility.
Auto Features’ Impact
Not surprisingly, one of the leading catalysts for plan participation has been the adoption of automatic enrollment, which has more than tripled since the passage of the Pension Protection Act in 2006. Plans with automatic enrollment had a 93% participation rate, compared with a participation rate of 70% for plans with voluntary enrollment.
Today, nearly 58% of plans and 76% of plans with at least 1,000 participants have adopted this design, bypassing the inertia and procrastination often responsible for inhibiting voluntary enrollment, Vanguard notes.
In addition, two-thirds of automatic enrollment plans have implemented automatic annual deferral rate increases. Meanwhile, automatic enrollment defaults have also increased over the past decade. In this case, Vanguard’s data shows that 59% of plans now default employees at a deferral rate of 4% or higher, compared with 35% of plans in 2013.
Participant Savings
What’s more, despite significant market uncertainty, nearly a quarter of participants saved at least 10% of their income for retirement and the average deferral rate remained at a historic high of 7.4% (the median deferral rate was 6.4% in 2022). With nearly 98% of participants also offered some type of employer contribution, the total average contribution rate was 11.3% (the median was 10.6%).
“But we still have work to do,” writes John James, Managing Director of Vanguard’s Institutional Investor Group. “We believe participants should be saving at least 12% to 15% of their pay to meet their retirement goals. We’re not there yet—but we’re close. Twenty percent of participants need a boost of just 1% to 3% to hit their target saving rate.”
Participant trading has also dramatically declined over the last 15 years, with just 6% of participants trading last year. This is attributable to the increased adoption of target-date funds and retirement savers valuing buy-and-hold strategies. The “sophisticated simplicity” of professionally managed allocations such as target-date funds is leading the trend, as just 2% of those participants traded during the same timeframe, Vanguard notes.
Managing Assets
The rising prominence of professionally managed allocations has also been essential to improvements in portfolio construction, the report further emphasizes.
At year-end 2022, 66% of all Vanguard participants were in an automatic investment program—compared with 7% at the end of 2004 and 40% at year-end 2013. Of these, 59% were invested in a single target-date fund, while 7% used a managed account program.
The firm also reports that employers are increasingly bolstering 401(k) plans with services designed to meet the broader financial needs of their employees, including advice.
In 2022, 41% of all Vanguard DC plans offered advice services; among larger plans with more than 5,000 employees, 81% offered advice. Taken together, nearly three in four plan participants now have access to advice, such as a robo-advisor or guidance from a CFP, the report shows.
“Building on the proven benefits of smart plan design, employers are increasingly exploring more comprehensive efforts to help their employees reach their long-term financial goals,” said John James, managing director and head of Vanguard Institutional Investor Group. “In addition to advice, forward-thinking plan sponsors are offering financial wellness tools such as student debt paydown and supplemental savings accounts like HSAs,” James notes.
The full How America Saves report can be found here.
