Want to Boost Retirement Saving? Automate It

TDFs are ubiquitous in 401(k)s and will probably stay that way, Vanguard says

Automation is key to improving participation in 401(k) plans. Automation is key to improving participation in 401(k) plans.

The trick to getting workers to save for retirement is to do it for them, according to Vanguard. The company issued its annual How America Saves report on Tuesday, which found automation is the key to getting employees to save and increase contributions.

More than a third of plans administered by Vanguard — including more than half of the firm's contributing participants — adopted automatic enrollment as of the end of 2013. Five years ago, less than a quarter of plans had adopted automatic enrollment.

Participation is higher among auto-enrolled workers. Vanguard found 82% of workers who were automatically enrolled in their plan stayed in, compared with 65% of workers who voluntarily signed up.

“401(k) and other defined contribution plans have enabled millions of American workers to accumulate savings for retirement. Automatic programs have played a key role in this success,” Jean Young, senior research analyst for Vanguard’s Center for Retirement Research and lead author of the report, said in a statement.

Vanguard analyzed data from its full-service recordkeeping plans for the How America Saves report, including more than 3 million participants.

Almost 70% of plans with automatic enrollment also feature automatic escalation. The large majority of those — 65% — increase annual contributions by 3% or less. Vanguard recommends a contribution rate of between 12% and 15%.

Vanguard announced last week that its Enroll Now tool helped increase the percentage of workers who chose to have their 401(k) contributions automatically increased each year to almost 60%, compared with 49% of new hires who used a traditional enrollment process.

The effect of those automatic features is reflecting in account balances. Among participants with a positive account balance in both 2008 and 2013, the median balance increased 182%. The average account balance in 2013 was $101,650.

"Balances are now well ahead of the peak levels achieved prior to the global financial crisis," Young said. "The effects of the market decline on retirement savings are now firmly in the past."

The report also examined the use of target-date funds, which are almost universally adopted in plans with automatic enrollment. Vanguard found 98% of auto-enrollment plans use a target-date fund, balanced fund or managed account as the default investment. Of those, 90% use a TDF.

Taking investment decisions out of workers’ hands is a trend that has been increasing and will only continue. Vanguard found that the percentage of workers who were entirely invested in those types of funds almost doubled since 2008, from 22% to 40%. Unsurprisingly, the overwhelming majority of those were in TDFs — 31%, compared with 6% of investors who were solely invested in a balanced fund and 3% in a managed account.

Vanguard estimates that by 2018, 58% of all participants and 80% of new participants will be entirely invested in a professionally managed option.

“A quarter of Americans are estimated to be partially prepared for retirement but need help getting the rest of the way. Another quarter are thought to be at risk for not being able to save enough for retirement altogether,” Young said. “Employers can do more to help both of these groups by enhancing their plans with features like automatic enrollment, annual saving increases and balanced default investment options.”

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