Participants Save, Participate, Transfer Less: Vanguard

October 21, 2002 ( - Participation, savings, and transfer rates were lower in 2001, according to a new report on savings trends.

According to the new report, “How America Saves 2002, a report on Vanguard Defined Contribution Plans,” the average plan participation rate fell to 76% in 2001 from 79% two years ago.   Significantly, Vanguard notes that the weighted participation rate was 65%, due to the lower participation rates at larger plans.   Those with less than 1,000 workers had an average participation rate of 70%, versus just 62% for plans with more than 5,000 workers, according to the Vanguard sampling.  


Larger plans are likely to have lower participation rates for two reasons:


  • They are more likely to offer other benefits, so participants are less likely to take advantage of the voluntary DC program
  • Large firms have greater communication challenges over diverse locations and divisions


Vanguard noted a strong correlation between income levels and participation rates.   While less than 1-in-5 participants earning $15,000 or less chose to participate in a plan, nearly half of those earning $15,000 to $30,000/year did so, and 89% of those earning more than $75,000/year did.


Savings “Account”


Vanguard participants are saving an average of 7.2% of their incomes, with a median savings rate of 6%.   However, both measures are down a full percentage point since 1999.   Vanguard notes that while no study has been done to qualify the reasons behind this result, the economic slowdown and poor stock returns may have discouraged savings behavior.  


On the other hand, Vanguard noted that deferral rates – the rate at which participants are actually having contributions taken from their pay based on recordkeeping calculations of deferrals divided by salary (versus the savings rate, which is the participant’s selected contribution rate at a point in time) was 8.1%.   Vanguard also noted that, while the actual deferral rate frequently tracks higher than the savings rate, trends in the first six months of 2002 indicate that participants are saving at a slightly higher rate than they were a year ago.


The average Vanguard account offers 14 investment options, compared with 12 in 1999.   Roughly 22% offer more than 15.   However, despite the modest increase in options, participant utilization remained flat – with participants electing to use just 3 funds from the menu, on average.   Nearly half (44%) use just 1 or 2 options, while only 13% use 6 or more.


For the average plan, nearly two-thirds of participant assets are invested directly in equities, and if balanced and lifestyle funds are woven into the mix, more than three-fourths are, according to the report.   That is, however, down slightly from the 78% recorded in 1999 – slippage which could be the result of nothing more than market forces.


Taking Stock


Part of that equity mix is company stock, which comprises 14% of the total.   Taking into account only those plans that offer company stock as an option (about 15% of the total), a full quarter of participant balances are so invested.   Over half (53%) of Vanguard platform participants have access to company stock, and 31% (numerically, rather than by balance) have made that investment.   Still, nearly half (40%) who have access to company stock as an option have invested no money in that choice.


Vanguard notes that plan sponsor interest in balanced and lifestyle funds has increased by 12% over the past two years.   Nearly half (40%) of Vanguard plans now offer lifestyle funds, compared with 28% two years ago.   Despite a relatively high level of availability, these options have drawn just 8% of participant assets, on average.   Suggesting that participants may be confused about the use of these options, more than half (55%) of participants with a lifestyle fund choice also hold one – or more – other investment fund.   Nearly 1-in-5 (18%) hold more than one lifestyle fund.


Interest in self-directed brokerage accounts and mutual fund windows has nearly doubled among Vanguard clients – but still represents just 7% of their client base – a figure about half to a third the industry average.


Most Vanguard-supported plans (more than 90%) offer an international option, but only 19% of participants have chosen that option, and those that do place about 12% of their balance there.


Change Range


When it comes to making changes, Vanguard reports that in 2001 just 14% of participants transferred balances, compared with 17% in 1999 and 18% in 2000.   Those 14% tended to have proportionately larger balances, however, since those movements represented 23% of plan assets at Vanguard.   However, that was less than the 32% of balances moved two years previously.   One fifth of one percent of participants moved 9% of all Vanguard DC assets in 2001, according to the report, while an additional 1% of participants were responsible for another 5%.   In 2001 transfers trended toward fixed income investments by about 2.5% net.


Vanguard, which in 2002 inked a deal with Financial Engines to offer online financial advice to its customers, noted that making investment education available raised participation rates by nearly 12% in absolute terms, while active participant involvement in such programs has boosted participation rates by nearly 20%.   Vanguard cited a study that also indicated that education boosted the rate of savings by nearly a full percentage point.


Touch Points


Nearly half the participant universe never contacted Vanguard regarding their retirement plan investments, roughly the same as in 1999.   On the other hand, roughly a quarter made contact with Vanguard on a “frequent” basis – an average of 38 times a year through all channels (including those quick account balance inquiries on the Internet), according to Vanguard.   So-called frequent contactors have balances that were nearly 2.5 times as large as the balances of those who made no contact.   Vanguard’s frequent contactors tend to be high-income, high-balance, and male.


The personal touch still has appeal with participants.   Forty-two percent of participants that did so reached out through customer service representatives, compared with 25% that did so via voice response, and a mere 14% on the Internet.   Interestingly enough, nearly half of the contacts came through voice response (reflecting multiple contacts from the same participant), and 40% of the touchpoints were via the Internet.   Just 13% of the total number of contacts was to the customer service center.


Loan Ranges


Fewer than 1 in 5 participants take a loan against their 401(k) balance at Vanguard, borrowing 14% of their balance, on average.   The average loan amount in 2001 was $6,800, down somewhat from $7,200 two years ago.   Roughly 60% of plans allow only one loan outstanding at a time, 28% allow two loans, and the remaining 10% allow more.   The number of loans permitted did not appear to alter either the number of participants or the total balance represented by the loan.  


The report, based on the experience of more than 2,100 plans and 2.5 million participants for which the firm provides recordkeeping services, also includes trend information on in-service withdrawals and rollovers, as well as insights on overall savings patterns.