VALLEY FORGE, Pa. - (Business Wire) More employees were put on the path to retirement security in 2007 by employers adopting automatic savings and investment solutions in their retirement plans, according to
How America Saves 2008, a comprehensive report on defined contribution retirement plans released today by Vanguard.
More than 300 defined contribution plans administered by Vanguard used automatic enrollment in 2007, triple the number in 2005. The plans with this feature, typically sponsored by larger companies, now account for 15% of all Vanguard®-administered plans, which cover one-third of Vanguard's total participant population. In addition, among the plans with automatic enrollment, two-thirds now feature automatic annual increases in savings rates, up from one-third in 2005.
Vanguard attributes much of this change to the tax and fiduciary incentives for automatic enrollment included in the Pension Protection Act (PPA) of 2006, and expects continued rapid adoption of automatic savings and investment solutions at both the plan and participant level. Another notable trend supported by the PPA has been a shift toward greater use of single-fund investment solutions, including balanced and lifecycle funds that were among the “qualified default investment alternatives” (QDIA) authorized by the U.S. Department of Labor in late 2007. By the end of 2007, 96% of the automatic-enrollment plans administered by Vanguard used a balanced strategy, typically a target-date retirement lifecycle fund, as the default option for new participants. This trend extended to plans with voluntary enrollment as well. Among all Vanguard-administered plans (voluntary and auto enrollment), one-quarter chose QDIAs by the end of the year. Of those, 84% selected a target-date fund and 16% chose another type of balanced fund.
“Defined contribution plans have become the most important retirement savings vehicle for private-sector U.S. workers,” said Steve Utkus, head of Vanguard’s Center for Retirement Research, which prepared the report. “Helping more people access these plans, encouraging greater savings rates, and providing ready-made, diversified investment portfolios can make a real difference in retirement security.” The report is based on analysis of the plan-based behavior of 3 million participants in more than 2,200 defined contribution plans.
Other highlights include:
- Participation and saving rates hold steady. Overall participation and contribution rates remained unchanged in 2007, indicating that participants stayed the course despite deteriorating economic and market conditions. In 2007, 75% of employees of companies with plans at Vanguard participated in their 401(k) plans, with an average contribution rate of 7.3%. Both figures are essentially unchanged since 2000.
- Shift to life-cycle options, especially target-date funds. Among plans at Vanguard, 84% offered life-cycle options in 2007—up from 33% in 2000. Increasingly, plans are shifting away from static-allocation funds, which require more participant decision-making, toward target-date funds. With the latter, once a participant chooses a target date fund that is closest to their date of retirement, the fund manager oversees the allocation. Nearly six in ten Vanguard-administered plans offered target-date funds in 2007. Meanwhile, participants’ usage of life-cycle funds generally has increased: Thirty-four percent invested in life-cycle funds in 2007 compared with 19% in 2000.
- Roth 401(k) adoption increases. The Roth 401(k) feature, an after-tax contribution option that became available in 2006, had been adopted by 24% of the Vanguard plans and 6% of their participants by the end of 2007. The Pension Protection Act made the Roth option permanent.
- High-risk exposure to company stock falls. A shift away from company stock holdings—first observed in 2006—continued into 2007. Among plans offering company stock as an investment option, the number of participants who invested more than 80% of their accounts in that stock fell almost by half, from 15% in 2005 to 8% in 2007.
- Participants preserve assets for retirement. During 2007, just 17% of participants eligible for a cash distribution from their plan elected one. The remaining participants kept their assets in retirement accounts, either leaving the assets in place or else rolling them over to an IRA or another qualified option. In total, 97% of all plan assets available for distribution were preserved in retirement accounts.
- Participants’ trading remains at a trickle. Overall trading levels were low, with only 15% of participants making one or more trades during 2007.
- Loan activity stays at low levels. In 2007, the level of outstanding loans was essentially unchanged from recent years. Only 16% of participants had an outstanding loan, borrowing about 12% of their account on average—figures very similar to previous years. About 2% of aggregate plan assets were borrowed by participants.
Editor’s Note: A copy of How America Saves is available at the following link, or by calling 610-669-0570.
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About Vanguard
Vanguard is among the leading retirement planning providers in the country, with more than $400 billion in assets under management in employer-sponsored retirement plans and $239 billion in IRA assets. It provides recordkeeping and investment services to 3 million participants and 1,800 plan sponsors in more than 2,200 defined contribution plans. Vanguard is also a major provider of investment, advice, and recordkeeping services to defined benefit plans.
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies. Vanguard manages nearly $1.25 trillion in U.S. mutual fund assets. Vanguard offers more than 150 funds to U.S. investors and more than 50 additional funds in non-U.S. markets.
All asset figures are as of July 31, 2008, unless otherwise noted.
For more information, visit www.vanguard.com, or call 800-662-7447 to obtain a fund prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Investments are subject to risk. Lifecycle funds are subject to the risks associated with their underlying funds.
Advice is provided by Vanguard Advisers, Inc., a registered investment advisor.
Vanguard Marketing Corporation, Distributor.
Vanguard
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