June 24, 2011

DC Plan Participants Recognize Benefits of Automatic Investment Programs

Automatic enrollment continues upward trend

Almost 30% of 401(k) participants are enrolled in automatic professionally managed investment programs, including target-date or balanced funds or a managed account advisory service, according to a study released Wednesday by Vanguard.

By the end of 2010, 29% of Vanguard participants were fully invested in an automatic investment program. One-fifth of participants held a target-date fund, 6% had a balanced fund and 3% used a managed account program. The report noted that automatic programs are especially beneficial to participants without the skills to invest on their own.

“The gVanguard logorowing number of participants taking advantage of professionally managed investment programs and services in their plan clearly shows that the 401(k) system can offer investors a successful way to invest for retirement,” Jean Young, coauthor of How America Saves 2011, said in a press release.

The average account balance in 2010 was over $79,000, with a median of just under $27,000. These are the highest levels recorded since 199 when Vanguard began tracking this data.

“Account balances have been cited as too low to be helpful in retirement,” Steve Utkus, coauthor of the report, said in a statement, adding that the typical participant is a 46-year-old male saving less than 9% with 20 to 25 years left to continue working and saving. “His retirement plan assets will be complemented by Social Security benefits and other savings, perhaps assets in other employer plans or a spouse’s plan, or personal savings. Even though we always encourage people to save more—ideally at least 12% to 15% of their income—the reality is that many participants may be on target for retirement.”

Automatic enrollment continued its upward trend, climbing three points since 2009 to 24% of plans. Participation, however, fell slightly to 74%. Economic conditions that prevented people from contributing offset gains made by automatic enrollment.

Automatic enrollment had a negative effect on contribution rates. Default deferral rates are often set too low, Vanguard found, and participants are unlikely to increase contributions on their own. As a result of that, and difficult economic conditions, the average deferral rate was 6.8%, unchanged from 2009 but down from its 2007 peak of 7.3%.

To offset plan fees, sponsors have turned to “index core” offerings, which provide a comprehensive set of low-cost index options that span the global capital markets. In 2010, 40% of Vanguard plans an index core, making the design available to about half of all Vanguard participants.

Unsurprisingly, hardship withdrawals have increased since 2005, but in 2010, just 2.2% of participants took a hardship withdrawal.

Of the 70% of employees who left their employer and were eligible to begin taking distributions decided to leave their assets with their employer or roll those assets into a new plan. Over 90% of plan assets available for distribution were preserved.

The survey was based on data on over three million participants in 2,000 Vanguard plans.

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