Vanguard: A Third of Eligibles Stayed on the Sidelines in 2005

The investment company’s latest annual statistical report of the defined contribution plans to which it offers recordkeeping services found that the composite participation rate for all eligible participants across all Vanguard employee contributory DC plans was 64%.

In the 2006 report featuring plan data for 2005, Vanguard researchers called the figure “a statistic indicative of the savings challenge facing America’s workers.”

With automatic plan features at or near the top of the retirement savings plan agenda in recent months, 8% of Vanguard DC plans with employee-elective contributions have adopted automatic enrollment and eight in 10 plans with automatic enrollment use a balanced or lifecycle fund as the default fund.

Among plans with automatic enrollment, four in 10 also automatically increase savings rates annually and use a balanced or lifecycle fund as the default fund.

Meanwhile, two-thirds of plans offered lifecycle funds in 2005, with 28% of participants in these plans holding lifecycle funds. Only 31% of participants owning lifecycle funds used them as they intended – as a “one-stop shopping” investment choice.

Participation, Deferral Rates

As have other similar studies, Vanguard’s report indicated that older and/or better-paid workers are more likely to be active in their employer’s plan than their younger and/or lower-paid counterparts. At all but the highest income levels, women are more likely to be participants while participation rates vary dramatically by industry. They range from 46% in the wholesale and retail trades to 73% in agriculture, mining, and construction, according to the Vanguard data.

Also in 2005, Vanguard participants voluntarily contributed an average of 7.31% of their incomes to their employers’ DC plans with a median of 6%. As with participation rates, income, age, and gender are key determinants of savings behavior.

The Vanguard data showed a wide disparity in employee contribution rates with one-quarter putting aside 10% or more during 2005 and about one-quarter of participants saving less than 4%. Just over one in 10 (11%) of participants pushed the legal limits by saving the maximum amount allowed under the Internal Revenue Code. Fourteen percent of eligible participants took advantage of the catch-up contribution feature.

As it has been in past years, employer contributions were a common plan feature, with 91% of plans offering an employer contribution and 91% of participants in plans with an employer contribution. The most common employer contribution was a match.

When it came to the type of company contributions, one size and shape definitely did not fit all. In 2005 Vanguard administered more than 200 distinct match formulas for plans offering an employer match. The most common was $0.50 on the dollar on the first 6% of pay with just over a fifth (21%) of plans providing this match and 23% of participants were in plans with this match.

Other Findings

The 2005 Vanguard data also showed that:

• The average number of plan investment options rose to 18.6 in 2005, but participants continued to adopt new choices at a slower rate than employers introduced them.
• Twelve percent of plans offered company stock as an investment option. Because large firms are more likely to offer company stock, 43% of Vanguard participants had access to company stock in their employer’s plan. About one-third of Vanguard plans offering company stock had a concentrated position higher than 20% of plan assets.
• As of 2005, approximately 70% of plan assets and participant contributions were invested in equities. Beneath these averages there are what Vanguard called “areas of concern”: 13% of participants had their entire account invested in fixed income securities; 19% held all-equity portfolios; and one-fifth had more than 20% of their account balance invested in company stock.
• While nearly all participants were offered a US equity index fund, only half used it.
• The average account balance for Vanguard participants was about $68,000 at year-end 2005; the median was nearly $24,000. One-third of participants had $10,000 or less in their current employer’s DC plan at year-end 2005 while 19% had account balances of more than $100,000. As household income, age, and job tenure rose, so did account balances.
• Despite the common view that young participants are responsible for the bulk of 401(k) loans, in fact, loan use is constant across the active participant population. Participants in their 30s, 40s, and even early 50s are just as likely to take a loan as participants in their 20s. On average, participants with loans borrowed a modest 13% of their account balance.