Among American DC plans automatically enrolling employees, the majority also automatically increase their contribution rate annually, setting up a growing number of employees for healthier retirement savings, according to a report.
The Vanguard report, How America Saves, is based on an analysis of the company’s direct full-service recordkeeping plans.
DC plans have enabled millions of American workers to accumulate savings for retirement, says Jean Young of Vanguard’s Center for Retirement Research and lead author of the report. “Automatic programs have played a key role in this success.”
According to the report:
Auto-enrollment is making a significant impact—34% of plans had adopted automatic enrollment as of year-end 2013, up from 24% five years earlier. More than half of all contributing participants in 2013 were in plans with auto-enrollment. Sixty-two percent of employees participating for the first time in 2013 were in plans that had adopted auto-enrollment.
Most auto-enrollment plans also automatically increase contribution rates, but some not enough—Of auto-enrollment plans, 69% automatically increase their participants’ contribution rate annually while 29% do not. Separately, 65% of auto-enrollment plans automatically increase participants’ contribution rate but default them at an initial 3% or less. Vanguard recommends that a typical participant target a total contribution rate of 12% to 15%, including both employee and employer contributions.
Target-date funds (TDFs) are the automatic investment choice for nearly all auto-enrollment plans—98% of auto-enrollment plans use a TDF, other type of balanced fund or managed account as the default investment. Nine out of 10 choose a TDF.
In 2013, 40% of participants were solely invested in an automatic investment program, compared with 22% at the end of 2008. Of those, 31% were invested in a single TDF, another 6% held a balanced fund and 3% used a managed account program. These options can dramatically improve portfolio diversification compared with participants making choices on their own. With the growing use of TDFs, Vanguard anticipates that 58% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed option by 2018.
“A quarter of Americans are estimated to be partially prepared for retirement but need help getting the rest of the way. Another quarter are thought to be at risk for not being able to save enough for retirement altogether,” she explains. “Employers can do more to help both of these groups by enhancing their plans with features like automatic enrollment, annual saving increases, and balanced default investment options.”
She also pointed to another emerging plan design strategy called re-enrollment, in which plan sponsors address portfolio construction issues by moving participants into investments such as target-date funds, balanced funds and managed accounts.
The report also notes that among continuous participants—those with a balance between both year-end 2008 and 2013—the median account balance rose by 182%, reflecting both the effect of ongoing contributions and market returns during this period.
“Balances are now well ahead of the peak levels achieved prior to the global financial crisis,” says Young. “The effects of the market decline on retirement savings are now firmly in the past.”
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