Vanguard Sees Positive Signs for Retirement Accounts

Participants in 2009 experienced higher account balances, traded minimally in response to volatility

Mutual fund giant Vanguard says many of its participants in 401(k) and other defined contribution plans are "well positioned for retirement security." The findings are included in How America Saves 2010, an annual analysis of defined contribution retirement plans and participant behavior which was released Friday, July 23.

The report--based on records for 3.2 million plan participants--found that many participants in 2009 experienced higher account balances, traded minimally in response to market volatility, increasingly diversified their assets through automatic investment programs, and protected their retirement nest egg when they left their employer. Only a very small group of participants appeared to be adversely affected by the tough economy, leading to a modest decline in plan participation and savings rates and slight increases in loans and hardship withdrawals.

"Despite the financial maelstrom of the past few years, we're seeing positive signs for many participants in employer-sponsored retirement plans," said Steve Utkus, head of Vanguard's Center for Retirement Research and a co-author of the report, in a prepared statement. "While there continue to be opportunities to improve saving rates and asset allocations, employees covered by these plans are benefiting from improved plan design, such as automatic enrollment and automatic deferral rate increases, as well as target-date funds."

At the end of 2009, the average account balance was $69,000, up 23% from year-end 2008. About two-thirds of participants had account balances at the end of 2009 that were higher than they were in September 2007, just prior to the stock market peak in October 2007. The median account balance rose by 10% for participants who had a balance in September 2007 and at year-end 2009, reflecting the effects of improving asset values and ongoing contributions. Over this 27-month period, only 6% saw declines of more than 30%.

"It's important to put these account balances into perspective," Utkus said. "The typical participant is a 45-year-old male who is saving 9.4% and will likely work another 20 to 25 years. His corporate retirement plan assets will be complemented by Social Security benefits and other savings, perhaps including a spouse's retirement plan. Even though there's always room for improvement, many participants are on track to be in good shape for retirement."

More participants used professionally managed automatic investment programs

In 2009, 25% of all Vanguard participants were solely invested in a professionally managed automatic investment option, such as a target-date fund, a balanced fund, or a managed account program--compared to just 7% only five years ago. Sixteen percent of all participants were invested in a single target-date fund; another 6% held one traditional balanced fund; and 3% utilized a managed account program.

That increase is important given the historically large proportion of participants who invest unwisely, at least from the perspective of financial professionals. For instance, even in 2009, 11% of Vanguard participants invested all of their plan assets in fixed-income options, while 14% put everything into stocks.

"Diversified, professionally managed automatic investment options help to eliminate portfolio construction errors and can dramatically reshape retirement plan outcomes," said Vanguard researcher and report lead author Jean Young. "It is encouraging that 25% of our participants have turned to target-date funds and other diversified balanced programs managed by investment professionals. The challenge is continuing to reach more participants who may stand to benefit from these programs."

In particular, the adoption of target-date funds continues to grow. By year-end 2009, 75% of Vanguard plan sponsors offered target-date funds and 42% of participants in those plans used the funds. As a result, one-third of all Vanguard participants have part, or all, of their retirement plan account invested in a target-date fund. It's important to note that half of these participants voluntarily chose their target-date funds versus being defaulted into them by their plan sponsor.

Participation and savings rates dip modestly

Key indicators of retirement savings trends are plan participation and contributions rates. In plans administered by Vanguard, the 2009 plan participation rate was 75%, down 2 percentage points from 2008. Increases in plan participation due to the growing use of automatic enrollment were offset by the number of participants who chose to stop participating, likely due to difficult economic conditions. Yet there was a marked increase in participation rates among lower-income and younger employees, a likely result of automatic enrollment.

The average employee deferral rate in 2009 was 6.8%, declining slightly from their peak in 2007 of 7.3%. Vanguard estimates that about half of the decline in contribution rates may be due to the economic environment and the other half results from increased adoption of automatic enrollment. Three-quarters of automatic enrollment plans set their default deferral rate at a low 3% or less, reducing the overall contribution rate.

Importantly, once employer contributions are added in, the average contribution rate in 2009 jumped to 9.4%. The result is that many participants are in better shape for retirement than has widely been assumed.

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