Financial advisors working in the 401(k) market or planning to should get a copy of Vanguard’s “How America Saves 2017” report on the 401(k) plans it manages, which highlights the latest trends in that market from one of its largest recordkeepers.
Vanguard services more than 8,500 401(k) plans, with 4.6 million-plus participants and more than $1 trillion in total assets. Its latest report is based on data from 1,900 qualified defined contribution plans with 4.4 million participants, and subsets of that data. Ninety percent of the plans are 401(k) or 403(b) plans; the other 10% are employer contributory plans such as a profit sharing or money purchase plans.
Here are some of the fastest growing trends the report reveals:
Increasing Use of Automatic Enrollment
The number of plans that automatically enroll employees grew 300% since 2007.
Forty-five percent of plans use automatic enrollment, but because larger plans are more likely to do so, that covers 60% of participants compared with just 17% at the end of 2007. By 2021, Vanguard expects three-quarters of participants will be covered by a plan using automatic enrollment.
“Automatic enrollment or autopilot plan design has reframed the savings decision,” according to the report. Under auto-enrollment, employees no longer have to choose to enroll in a 401(k) since that decision is already made for them, but they can choose not to participate.
About two-thirds of plans using auto-enrollment have also eliminated the need for employees to increase their contribution rates because that, too, is automatic. The most popular deferral rate for auto enrollment plans is 3%, accounting for 44% of those plans; 20% have a default deferral rate of 6% or more.
Rising Participation Rates
The growing use of auto-enrollment plans has led to greater participation among employees.
An estimated 81% are enrolled in defined contribution plans compared to 76% at year-end 2007 and the participation rate among plans with automatic enrollment is even higher — 90% compared with just 63% of plans using voluntary enrollment.
Ironically, while participation rates have increased among employees because of auto-enrollment, contribution rates have fallen, for the same reason. Participants saved an average 6.2% of their income in 2016, and a median 5% — both lower than those respective rates for every year since 2007.
The Vanguard report explains that automatic enrollment “leads to lower contribution rates when default deferral rates are set at low levels, such as 3% or lower,” and close to half the plans using automatic enrollment use a 3% contribution rate. The other half uses a rate of 4% or more, including 20% set at 6% or higher.
Participation rates, not surprisingly, are highest for those earning the most income — 93% of employees earning more than $100,000 — and lowest among those with the least income — 65% among those earning less than $30,000, but still nothing to scoff at.
About two-thirds of auto-enrollment plans have implemented accelerated annual contribution rates, with 4% deferral being the most popular, accounting for 48% of plans compared with 24% in 2007. For 20% of plans, the default contribute rate is 6% or more — nearly triple the share of plans in 2007.