In 2011, 33% of all Vanguard participants were invested in a professionally managed allocation program: 24% in a single target-date fund (TDF); 6% in a single traditional balanced fund; and 3% in a managed account advisory program. The total number is up from 9% at the end of 2005.
These options dramatically improve portfolio diversification for many participants, helping to reduce the risks associated with either having too much in equities (which could expose a participant to considerable market volatility) or too little (reducing the long-term return potential of a retirement portfolio). For instance, in 2011, a total 18% of participants took an extreme position in equities, holding either 100% in equities (10% of participants) or no equities (8%). In contrast, a total of 34% of participants held extreme equity positions in 2005.
Fueling much of the growth of these programs is the soaring adoption of target-date funds (TDFs). Eighty-two percent of plan sponsors offered target-date funds in 2011, up from 28% in 2005. Forty-seven percent of all participants use TDFs. While the growth of these funds is frequently attributed to their designation as the investment default in automatic enrollment plans, many participants are voluntarily choosing TDFs. In plans with voluntary enrollment, 48% of participants are invested in TDFs.Vanguard believes the surge of TDF usage will continue to influence the adoption of professionally managed allocations. “Largely because of the growing use of target-date options, we anticipate that 55% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed allocation by 2016,” said Jean Young, chief author of “How America Saves.”
Vanguard’s “How America Saves 2012” found the 2011 plan participation rate was 76%, unchanged from 2010. Automatic plan enrollment continues to rise. In 2011, 29% of Vanguard plans had adopted automatic enrollment, up two percentage points from 2010. Employees in plans with an automatic enrollment feature at the end of 2011 had an overall participation rate of 80%, compared with a participation rate of only 60% for employees in voluntary enrollment plans. Seven in 10 automatic enrollment plans have implemented automatic annual deferral rate increases, up from three in 10 in 2005. Automatic enrollment particularly improves participation rates among traditional non-savers: young, short-tenure and lower-income workers.
The average participant deferral rate rose to 7.1% and the median (which reflects the typical participant) was unchanged at 6%. The aggregate average plan savings rate—including both participant and employer contributions—was 10.4% in 2011. Vanguard’s view is that investors should save 12% to 15% or more. For participants with lower wages, Social Security is expected to replace a higher percentage of income, and so a lower retirement savings rate may be appropriate. For those earning higher wages, Social Security replaces a lower percentage of income, and savings rates may need to be higher.
The median account balances of continuous participants—those with an account balance at both the end of 2010 and 2011—rose by 10%. Eight in 10 of these continuous participants saw their balances rise because of conservative asset allocations (for example, being invested exclusively or predominantly in fixed-income holdings) and ongoing contributions. In 2011, the median participant account balance was $25,550 and the average was $78,296. “It’s important to keep in mind that typical participants are in their mid-40s and saving 10%, with about eight years of tenure with their current employer, and 20 to 25 more years to grow their account,” said Steve Utkus, head of Vanguard’s Center for Retirement Research and co-author of the report. “Furthermore, their retirement plan assets will likely be complemented by Social Security benefits and other savings, including assets in other employer plans, a spouse’s plan, or personal savings accounts.”
In 2011, 18% of participants had an outstanding loan, unchanged from the year before. Only 4% of participants took an in-service withdrawal; weak economic conditions appeared to be affecting the withdrawal behavior of a very small group of participants. In addition, participants separating from service largely preserved their assets for retirement. During 2011, about 30% of all participants could have taken their account as a distribution because they had separated from service in the current year or prior years. The majority of these participants (83%) continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an individual retirement account (IRA) or a new employer plan. They preserved 96% of the available assets.
With the intensifying focus on plan fees, plan sponsors are increasingly interested in offering a wider range of low-cost index funds, including an “index core,” a comprehensive set of low-cost index options that span the global capital markets. In 2011, 44% of Vanguard plans offered a set of options providing an index core. Because large plans have adopted this approach more quickly, slightly more than half of all Vanguard participants were offered an index core as part of their plan’s overall investment menu.
“How America Saves” is based on an analysis of Vanguard’s full-service recordkeeping plans. Along with looking at the overall retirement saving and investing behavior of Vanguard’s more than three million participants, “How America Saves” this year includes supplemental reports on participant patterns in the defined contribution (DC) retirement plans of 12 specific industries.The “How America Saves 2012” report is at http://www.vanguard.com/has2012.