According to the report, “How America Saves 2013,” it is estimated that 55% of all participants will be entirely invested in a professionally managed investment option by 2017. Vanguard found that in 2012, 36% of all participants in 401(k) retirement plans at Vanguard invested their plan assets in a professionally managed investment option.
The firm also found 27% of all participants in 2012 were invested in a single target-date fund, 6% held a single traditional balanced fund, and 3% used a managed account advisory program. The total number of participants invested in a professionally managed allocation has more than doubled from 17% at the end of 2007.
Furthermore, 14% of participants who were offered an investment advice service through their plan adopted one. “The number of participants completely turning their portfolio construction over to a professional, or obtaining advice from professionals, is an important trend in the potential future financial security of retirees,” said Jean Young, co-author of the report. “It represents a shift in responsibility for investment decision-making away from participants—many of whom may be inexperienced investors—to investment and advice programs that have been vetted by employers as part of their fiduciary obligations.”
The average plan account balances rose by 10% in 2012, to $86,212, reflecting the effect of both ongoing contributions and market returns. For participants with a balance at both the end of 2007 and the end of 2012—the worst five-year period in the markets in most people’s lifetimes—the median account balance grew by 67% for the same reasons. Nearly 90% of participants in this group saw their balances rise during this time.
“Some may look solely at plan account balances and underestimate the retirement readiness of Americans, saying that most of us still aren’t financially prepared for retirement,” said Steve Utkus, director of the Vanguard Center for Retirement Research and co-author of the report. “But when you look at the data comprehensively, the fact remains that many Americans are doing a good job accumulating private savings to supplement Social Security in retirement.”
Many participants were found to be strong savers in their plan. One-fifth of them saved 10% or more, 11% saved the maximum allowed, and 15% of participants older than age 50 made catch-up contributions in 2012. Taking into account both contributions made by participants and those made by employers to participants’ accounts, the average total savings rate was 10.5% in 2012.
However, one-third of participants contributed less than 4% themselves. The average participant deferral rate was 7% in 2012, down slightly from the peak of 7.3% in 2007. The decline is largely due to the default contribution rates set by many automatic enrollment plans. Although automatic enrollment raises plan participation rates and thus helps to ensure more people overall save for retirement, the default rates can be set too low (3% or less), said the report, and thus pull down the overall average savings rate.
Vanguard recommends an annual savings rate of 12% to 15%, depending on income level. “While we are seeing good news overall in the retirement planning habits of participants, many Americans are still not saving enough for the future,” Young said. “Simply put, people need to save more and save more now.”
Other 2012 highlights of the report include:
- Fifty-one percent of all participants were invested in one or more target-date funds.
- Thirty-two percent of Vanguard plans had adopted automatic enrollment, up 3 percentage points from 2011. More than half of all contributing participants in 2012 were in plans with automatic enrollment. Seven in 10 such plans had implemented automatic annual deferral-rate increases. And 97% of automatic enrollment plans defaulted their participants into a balanced investment strategy, with nine in 10 choosing a target-date fund as the default.
- The Roth 401(k) feature was adopted by 49% of Vanguard plans, and 11% of participants within these plans had elected the option.
- More participants had access to low-cost index funds. Factoring in index target-date funds, 82% of participants held equity index investments.
- The percentage of plan assets invested in equities, which stood at 73% in 2007 just after the peak of global stock prices, declined to 66%.
- Only 12% of plan participants traded within their accounts. On a net basis, participants who traded shifted 1.7% of assets to fixed income, representing small changes to their overall portfolios. Only 1% of all participants abandoned equities altogether.
- About 30% of all participants could have taken their account as a distribution because they left their employer in 2012 or prior years. The majority of them (82%) preserved their plan assets for retirement by remaining in their employer’s plan or rolling over their savings to an IRA or to a new employer’s plan.
The report can be found here.