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 defined contribution 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.
“Plan sponsors — and the industry as a whole — must bear the responsibility to continue the significant progress impelled by the PPA, including driving improved savings rates for all participants,” added King. “Moreover, the 401(k) system needs to cast a wider net to afford the opportunity for more Americans to prepare financially for retirement and capitalize on the advantages of these plans.”
As of year-end 2015, 41% of Vanguard plans had adopted automatic enrollment, up from just 10% of plans a decade ago, the group says. Of those plans, 70% featured automatic annual increases. Last year, 63% of new Vanguard participants were hired under automatic enrollment vs. 12% in 2006.
Vanguard adds that its research has shown that automatic enrollment can more than double participation rates in comparison to voluntary enrollment plans. In 2015, three-quarters of eligible employees participated in their employer’s plan, up from two-thirds a decade ago.
The use of target-date funds has nearly doubled since the passage of the PPA, with 90% of Vanguard-plan sponsors offering target-date funds to employees at year-end 2015. Overall, 98% of participants now have access to them, and 70% of participants use target-date funds.
“Target-date funds are, without question, a game changer and one of the most important elements of the 401(k) evolution,” said Jean Young, lead author of Vanguard’s latest report on defined contribution plans. “As defined contribution plans evolved, it was clear that many workers were not going to serve as their own investment manager. As a result of the rise of target-date funds, we’ve seen dramatic improvements in the portfolio construction of 401(k) participants.”