Vanguard: automatic features and TDFs have improved retirement readiness in 2020

Plan design features, such as automatic enrollment, automatic indexing and target date funds, have helped DC plan members stay on course and improve retirement outcomes, according to the latest edition. most recent of the company’s How America Saves study.

The adoption of automatic enrollment has more than tripled since the end of 2007, the first year after the entry into force of the Pension Protection Act of 2006, notes Vanguard in 2021 How America is Saving, now in its 20th year. As a result, automatic enrollment has saved employees 50% more for their retirement than those in companies offering voluntary enrollment.

The research examines pension data from 4.7 million defined contribution plan members across the company’s record-keeping activities, including 1,400 plan sponsors and $ 1.7 trillion. defined contribution assets under management.

By the end of 2020, 54% of Vanguard plans had adopted automatic enrollment, including 74% of plans with 1,000 or more participants. In 2020, because larger plans were more likely to offer it, 69% of participants were in plans with an auto-enrollment option.

Additionally, research found that two-thirds of auto-enrollment plans implemented automatic increases in the annual deferral rate. Auto-enrollment defaults have also increased over the past decade. According to the report, 57% of plans now default to employees at a deferral rate of 4% or more, up from 30% of plans in 2011.

Vanguard notes that annual automated deferral increases saved participants 20 to 30 percent more after three years than employees without automatic increases.

Balanced strategy

Professionally managed allowances have also helped more participants save for retirement and stay focused for the long term, even in the wake of unprecedented market uncertainty over the past year.

Almost all (99%) auto-enrollment plans failed participants in a balanced investment strategy in 2020, with 98% choosing a target date fund as their default fund. In turn, the increasing use of TDFs by participants has resulted in a 75% decrease in extreme equity allocations among participants over the past 15 years.

The TDFs also hampered frequent exchanges. Vanguard found that 96% of participants with a single TDF had not made a trade last year. “Not only have most resisted dipping into their accounts, participants’ savings rates have remained stable. This is a testament to the growing use by plan sponsors of automatic solutions, which take advantage of inertia for the benefit of the plan member, ”Vanguard says, adding,“ Of course, the idea of ​​investor inertia is not. not a new learning, but it is now a battle-tested in a very unusual environment.

Savings measures

High-level measures of participants’ savings behavior were stable in 2020, notes Vanguard. The participant-weighted participation rate was 78% in 2020, compared to 74% in 2011. However, automatic enrollment plans had a participation rate of 92%, compared to a participation rate of 62% for automatic enrollment plans. voluntary membership. The report further observes, however, that as more plans adopt automatic enrollment, the remaining group of voluntary plans have seen participation rates deteriorate.

The average deferral rate was 7.2% in 2020, which is a slight increase from 6.9% in 2011. The median deferral rate was 6% in 2020, which Vanguard notes have remained unchanged since as well. long as he follows this measure.

Including both employee and employer contributions, the average total contribution rate of participants in 2020 was 11.1% and the median was 10.2%. These rates have remained stable over the past 15 years, the report notes. By including non-participants, employees hired under automatic enrollment plans saved an average of 10.7%, including both employee and employer contributions. Yet employees hired under a voluntary enrollment design only saved an average of 6.8%, due to significantly lower participation.

Ideas for action

Last year, Vanguard Strategic Retirement Consulting (SRC) launched “How America Saves: Insights to Action“, a supplemental report offering effective plan design recommendations that can dramatically improve member outcomes. This year’s report encourages plan sponsors to focus on four key areas:

  • Implement automatic features, including automatic enrollment with automatic annual increases; defaulting participants at 6%, or at least to the corresponding employer; and perform reenrollment, sub-economy, and auto-augmentation scans.
  • Consider an advisory solution to help plan members succeed with their retirement savings and spending, regardless of market conditions, through portfolio, financial and emotional value.
  • Adopting retiree-friendly policies by allowing flexible payments and withdrawals for retirees, providing valuable modeling and spending tools, and offering an advisory option that includes solutions regarding retirement income.
  • Reduce frequent loans and withdrawals by limiting participants to one outstanding loan at a time, accounting for plan savings, setting minimum limits for withdrawals in hardship, and limiting the frequency of withdrawals to two per year, and setting a “cool down” period between loan repayment and a new loan.

“Retirement savings are only one part of a member’s overall financial situation, and they are increasingly looking to their employer’s plans for personalized advice and solutions that take a more overall financial well-being, ”said John James, Managing Director and Head of Vanguard Institutional Investor Group.

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