DC plan participation rates rising, helped by auto-enrollment

Participation in employer-sponsored 401(k) plans has slowly crept up over the past decade, in large part because of actions taken by plan sponsors.

Employers have implemented investment menu design decisions that have helped to move the needle up on the number of people saving for retirement. At the end of 2014, 36% of Vanguard plans had implemented auto enrollment, a 50% increase since 2009, and 60% of newly hired employees participating in Vanguard 401(k) plans were automatically enrolled.

“The first step in retirement savings is participation,” says Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research. “Over the past decade, we’ve seen a meaningful jump in total participation rates. Three-quarters of eligible workers now participate in their employer’s plan, up from two-thirds 10 years ago, underscoring the impact of autopilot plan designs.”

About half of Vanguard’s plans are now using automatic enrollment for current employees who never participated in the plan and seven in 10 auto-enrollment plans have implemented automatic annual deferral-rate increases, Vanguard said in its report, How America Saves 2015.

Target-date funds have had a positive impact on the number of people saving for retirement at work. About 88% of Vanguard’s 401(k) plans use TDFs, many as the default investment vehicle, and 64% of employees are taking advantage of them.

Last year, $4 for every $10 deposited in Vanguard plans was invested in target-date funds, the company says.

Target-date funds have reduced the number of employees who invest in only one type of investment. In 2014, only one-in-eight people held what Vanguard calls an extreme allocation position — 8% of participants held only equities while 5% held no equities in their portfolios. A decade ago, one-in-three participants held extreme allocation positions, with 21% holding all-equity portfolios and 13% holding no equities at all, according to Vanguard research.

Plan sponsors have become more cognizant of fees and have incorporated a wider range of low-cost index funds into their plans. Half of Vanguard plans now offer a comprehensive set of low-cost index options that span the global capital markets.

Vanguard found that more participants are saving at higher rates than in the past.

“About half of participants in Vanguard-administered defined contribution plans are saving 10% or more,” said Young.

The report also found that in plans with automatic enrollment, more than 60% enroll at default rates of 3% or less. Auto-enrollment boosts participation rates, but it can lead to lower contribution rates when default deferral rates are set at those levels. Vanguard recommends a target savings rate of 12%-15%, including employer match.

“Plan sponsors are playing a more assertive role in shaping participant outcomes, and we commend them for their diligent efforts in designing, overseeing, and continually improving their plans,” says Martha King, head of Vanguard’s institutional investor group. “At the same time, we share with our sponsor clients an obligation to move the dial on savings rates, and give participants the best chance for investment success.”

Paula Aven Gladych is a freelance writer based in Denver.


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