Employees are saving for retirement at an increasing rate thanks to initiatives implemented by plan sponsors during the past two decades, including the adoption of target date funds, automatic plan design features and advice solutions.
These successes have not stopped plan sponsors from innovating, according to Vanguard's recent study "How America Saves 2021: Insights Into Action."
The report, which is the 20th edition of the firm's study of retirement plan data, discovered that plan sponsors continue to adopt plan design features that can help participants build their retirement savings and spend wisely in retirement.
The report is broken into four broad themes that span plan design considerations from expanding automatic features to delivering value and finding balance to maximize returns.
Automatic Features
Vanguard predicted automatic solutions will grow in popularity beyond auto-enrollment features, which have proven to be successful in improving retirement outcomes. Plans that used auto-enrollment features had a 92 percent participation rate last year compared with 62 percent for plans with voluntary enrollment, according to the study.
In addition, employees who worked for firms offering automatic enrollment saved at least 50 percent more for retirement last year than those employed at firms with voluntary enrollment. The study noted most retirement plans with automatic enrollment default into a target-date fund, which encourages balance and yields benefits to savers over time.
Firms increasingly are bumping up their default rate as well, the study found. More than half of the companies it surveyed have a default rate of 4 percent or more and one-quarter of plans started employees at a 6 percent default rate.
Higher default rates did not cause an increase in opt-outs, indicating that plan sponsors don't need to worry about participation decreases when increasing defaults, the report said.
Vanguard said participants enrolled in a plan with automatic increases save up to 30 percent more than those without such features. Auto-increases are a critical factor in getting employees to a savings rate of 12 to 15 percent, which Vanguard said it recommends for financial success in retirement.
Managed Account Advice
The report also foresees plan sponsors increasingly offering in-plan advice, with more employees finding value in these offerings and using them with greater frequency. Managed account advice has eliminated extreme equity allocations and improved diversification, according to Vanguard.
In addition, by using managed account advice, 70% of participants increased their projected 10-year retirement wealth by an average of 23%, which can be attributed to higher expected returns due to increased equity exposure and higher savings rates, the study found.
