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How 401(k) Plan Changes Affect Savings: Vanguard

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What You Need to Know

  • The latest study breaks down what's working and what plan sponsors can do to improve retirement preparedness.
  • According to the study, 80% of savers want help converting savings into income.
  • The report acknowledges that financial emergencies may necessitate the use of retirement funds to meet current needs.

Employees are saving for retirement at an increasing rate thanks to initiatives implemented by plan sponsors during the past two decades, including the adoption of target date funds, automatic plan design features and advice solutions.

These successes have not stopped plan sponsors from innovating, according to Vanguard’s recent study “How America Saves 2021: Insights Into Action.”

The report, which is the 20th edition of the firm’s study of retirement plan data, discovered that plan sponsors continue to adopt plan design features that can help participants build their retirement savings and spend wisely in retirement.

The report is broken into four broad themes that span plan design considerations from expanding automatic features to delivering value and finding balance to maximize returns.

Automatic Features

Vanguard predicted automatic solutions will grow in popularity beyond auto-enrollment features, which have proven to be successful in improving retirement outcomes. Plans that used auto-enrollment features had a 92 percent participation rate last year compared with 62 percent for plans with voluntary enrollment, according to the study.

In addition, employees who worked for firms offering automatic enrollment saved at least 50 percent more for retirement last year than those employed at firms with voluntary enrollment. The study noted most retirement plans with automatic enrollment default into a target-date fund, which encourages balance and yields benefits to savers over time.

Firms increasingly are bumping up their default rate as well, the study found. More than half of the companies it surveyed have a default rate of 4 percent or more and one-quarter of plans started employees at a 6 percent default rate.

Higher default rates did not cause an increase in opt-outs, indicating that plan sponsors don’t need to worry about participation decreases when increasing defaults, the report said.

Vanguard said participants enrolled in a plan with automatic increases save up to 30 percent more than those without such features. Auto-increases are a critical factor in getting employees to a savings rate of 12 to 15 percent, which Vanguard said it recommends for financial success in retirement.

Managed Account Advice

The report also foresees plan sponsors increasingly offering in-plan advice, with more employees finding value in these offerings and using them with greater frequency. Managed account advice has eliminated extreme equity allocations and improved diversification, according to Vanguard.

In addition, by using managed account advice, 70% of participants increased their projected 10-year retirement wealth by an average of 23%, which can be attributed to higher expected returns due to increased equity exposure and higher savings rates, the study found.

Advice also helps overcome emotional decision-making related to retirement savings that isn’t always in the best interest of participants, the report said. Through careful behavioral coaching, advice can help retirees remain calm and focused on their long-term plans even during market volatility, said Vanguard.


Plan sponsors are increasingly focused on the decumulation phase of retirement saving, said the report. With 10,000 baby boomers continuing to reach retirement age per day, questions about spending rates, tax efficiency, Social Security claiming strategies and guaranteed income are top of mind for pre-retirees.

According to the study, 80% of savers want help converting savings into income, and most participants seem reluctant to leave their plan when they retire, which could indicate they are feeling overwhelmed.

Last year, 83% of employees that had separated from their company and could have taken their savings as a distribution either remained in the employer plan or rolled their funds into an IRA, said the report.

Vanguard said this behavior should be encouraged because employer-sponsored plans can provide safety and benefits that can improve retirement outcomes, including fiduciary oversight and investment choice guidance as well as institutional pricing.

This scenario benefits plan sponsors as well, providing scale that can give plan sponsors bargaining power to advocate on behalf of the plan. Plan sponsors can make a plan retiree-friendly by not forcing participants out at a certain age, permitting flexible withdrawals and allowing installments, said Vanguard.

Loans, Withdrawals

Finally, the report acknowledges that times of financial emergency might necessitate the use of retirement funds to meet current needs.

During 2020, loan initiations actually decreased 20%, with significant declines in April and May when the economy experienced shutdowns due to the pandemic, which may have reduced both consumer spending and housing transactions. Both traditional hardship and non-hardship withdrawals trended lower during the year as well, not including Coronavirus-related distributions (CRDs).

As such, plan sponsors should consider reasonable plan rules that balance the needs of participants with the goal of preserving plan assets for retirement.

These strategies include limiting participants to one loan at a time, implementing plan savings sweeps to help participants who accessed assets in 2020, setting minimum limits for hardship withdrawals, restricting withdrawal frequency to twice per year and setting a ‘cooling off’ period of between 30 days and 6 months between paying off a loan and taking a new one.