Vanguard: Auto Features, TDFs Boosted Retirement Readiness in 2020 – National Association of Plan Advisors

Plan design features, such as auto-enrollment, auto-escalation and target-date funds, helped DC plan participants stay the course and improve retirement outcomes, according to the mostrecent edition of the firmsHow America Savesstudy.

The adoption of automatic enrollment has more than tripled since year-end 2007, the first year after the Pension Protection Actof 2006 took effect, Vanguard notes in2021 How America Saves, now in its 20thyear. Consequently, automatic enrollment has helped employees save 50% more for retirement than those at companies offering voluntary enrollment.

The research exams retirement plan data from 4.7 million DC plan participants across the firms recordkeeping business, comprised of 1,400 plan sponsors and $1.7 trillion in DC assets under management.

At year-end 2020, 54% of Vanguard plans had adopted automatic enrollment, including 74% of plans with at least 1,000 participants. In 2020, because larger plans were more likely to offer it, 69% of participants were in plans with an automatic enrollment option.

Additionally, the research found that two-thirds of automatic enrollment plans have implemented automatic annual deferral rate increases. Automatic enrollment defaults have also increased over the past decade. According to the report, 57% of plans now default employees at a deferral rate of 4% or higher, compared with 30% of plans in 2011.

Vanguard notes that annual automated deferral increases resulted in participants saving 20-30% more after three years than employees without automatic increases.

Balanced Strategy

Professionally managed allocations have also helped more participants save for retirement and keep their focus on the long term, even in the wake of last years unprecedented market uncertainty.

Nearly all (99%) plans with automatic enrollment defaulted participants into a balanced investment strategy in 2020with 98% choosing a target-date fund as the default. In turn, participants increasing use of TDFs has led to a 75% decrease in extreme equity allocations among participants over the last 15 years.

TDFs have also tamped down frequent trading. Vanguard found that 96% of participants holding a single TDF did not make a trade last year. Not only did most resist dipping into their accounts, but participant saving rates remained stable. Its a testament to plan sponsors growing use of automatic solutions, which leverage inertia for the benefit of the participant, Vanguard says, adding, Of course, the idea of investor inertia is not a new learning, but it has now been battle-tested in a very unusual environment.

Savings Metrics

High-level metrics of participant saving behavior were steady in 2020, Vanguard notes. The participant-weighted participation rate was 78% in 2020, up from 74% in 2011. However, plans with automatic enrollment had a 92% participation rate, compared with a participation rate of 62% for plans with voluntary enrollment. The report further observes, however, that as more plans adopt automatic enrollment, the remaining pool of plans with voluntary enrollment has seen participation rates deteriorate.

The average deferral rate was 7.2% in 2020, which is up modestly from 6.9% in 2011. The median deferral rate was 6% in 2020, which Vanguard notes is unchanged for as long as it has been tracking this metric.

When including both employee and employer contributions, the average total participant contribution rate in 2020 was 11.1%, and the median was 10.2%. These rates have remained stable for the past 15 years, the report notes. When including nonparticipants, employees hired under automatic enrollment plans saved an average of 10.7%, considering both employee and employer contributions. Yetemployees hired under a voluntary enrollment design saved an average of only 6.8%, due to significantly lower participation.

Insights to Action

Last year, Vanguard Strategic Retirement Consulting (SRC) launchedHow America Saves: Insights to Action,a supplementary report offering effective plan design recommendations that can meaningfully improve participants outcomes.This years report encourages plan sponsors to focus on four key areas:

Retirement savings is just one piece of a participants broader financial picture, and they are increasingly looking to their employer plans for customized advice and solutions that take a more comprehensive approach to financial well-being, emphasizes John James, managing director and head of Vanguard Institutional Investor Group.

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Vanguard: Auto Features, TDFs Boosted Retirement Readiness in 2020 - National Association of Plan Advisors