The number of individuals participating in retirement plans with Vanguard continues to expand, growing to 3.9 million in 2015 from 3.6 million in 2014. But the average and median level of balances weakened last year, according to the fund company, as the median savings (or deferral) rate fell and the average deferral rate stayed unchanged.
“The Pension Protection Act [of 2006] codified many of the ‘auto pilot’ features that Vanguard and others in the industry had been advocating for in retirement plans for years,” said Martha King, managing director of Vanguard’s Institutional Investor Group, in a statement. “The improvements brought on by the industry, amplified by the PPA, has continued to bolster our defined contribution system and cements our view that 401(k) plans are a critical component to helping ensure the retirement security of millions of Americans.”
The average account balance for Vanguard participants in 2015 was close to $96,300 – down from about $102,300 in the prior year. The median balance, however, was just about $26,400 vs. $29,600 in 2014. These represent declines of 6% and 11%, respectively, according to Vanguard’s latest “How America Saves” report, released Tuesday.
The fund group, which has some $800 billion in defined contribution assets, says there are two factors contributing to this situation – the first being Vanguard’s changing business mix: New plans converting to Vanguard had lower account balances in 2015, it says. The second issue is the growing prevalence of auto enrollment, which leads more employees to save but often with small balances. Auto enrollment tends to particularly boost participation among younger and lower-paid workers, who “tend to exhibit lower savings behaviors,” according to the report.
Vanguard adds that in late 2015, more than 33% of participants joined their plans under automatic enrollment. Also, from 2010 to 2015, median balances fell 2%, but average balances grew 22%.
The group also explains that the rise of automatic enrollment has “had an inverse effect on deferral rates,” noting that while automatic enrollment boosts participation rates, “it can lead to lower contribution rates when default deferral rates are set at insufficient levels.” according to the fund group. Vanguard said it recommends a target savings rate of 12%–15%, including an employer match.