Modern Retirement Plan Design Boosts Savings Behavior: Vanguard

Since the U.S. Congress passed the Pension Protection Act in 2006, plan sponsors have increasingly used plan design to influence employee retirement savings behavior, with positive outcomes.

Vanguard's How America Saves 2019 report, released Tuesday, finds that increased adoption of automatic savings features has helped more plan employees to save at near optimal levels and do so more effectively.

According to the report, adoption of automatic enrollment has tripled since the end 2007. At year-end 2018, 48% of Vanguard plans had adopted automatic enrollment and 66% of new plan entrants were enrolled via automatic enrollment.

Including contributions from both employees and employers, the average 15-year total participant contribution rate last year was 10.6% and the median was 9.8%. Two-thirds of auto-enrollment plans have implemented automatic deferral rate increases.

At the end of 2018, 52% of all participants were invested in a single target date fund, 3% held one other balanced fund and 4% used a managed account program.

Vanguard said these professionally managed investment portfolios improved portfolio diversification compared with those in which participants made their own choices.

Not only that, but extreme allocations have decreased with increased use of target date funds and other professionally managed portfolios. Just a tenth of participants in the report had taken an extreme position: 6% held 100% equities, and 3% held none.

"Our research, including How America Saves, has shown plan sponsors have a continued commitment to improving plan design for participants, which has led to positive results — increased participation, savings rates and improved portfolio construction," Martha King, managing director of Vanguard's institutional investor group, said in a statement.

"Moreover, the greater adoption of target date funds signals a shift in responsibility as participants' investment decision-making is increasingly moving toward employer-selected investment and advice programs."

Savings Behavior Improvements

The Vanguard report found that plan participants were increasingly improving their savings behavior. Last year, faced with U.S. equity market volatility, only 8% of participants made one or more portfolio trades or exchanges during the year.

In addition, among plans that offer company stock, fewer participants were holding concentrated positions — that is, more than 20% of their account balance in company stock. Last year, 19% of participants held a concentrated position, compared with 30% in 2009.

Preserving assets for retirement is increasingly on people's minds. According to the report, about one-third of all participants could have taken their account as a distribution during 2018 because of a separation of service in the current year or prior years.

But 81% of these participants either stayed in their employer's plan or rolled 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," Jean Young, the report's lead author and senior research associate with Vanguard Center for Investor Research, said in the statement.

"The trend toward preserving retirement savings upon separation of service is especially encouraging, as it shows participants are thinking long term."

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