Data and Research June 11, 2015

No Surprise—Fees Remain a Top Topic

The retirement plan industry shows little sign of dropping its focus on fees and lowering the cost of investing.
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The 2015 edition of Vanguard’s “How America Saves” study finds plan sponsors and advisers are in general focused on plan fees and bringing meaningful savings to the participants they serve.

The annual study shows more plan sponsors have incorporated a wider range of low-cost index funds into their plans, Vanguard notes. The firm says half of its plan sponsor clients now offer an “index core lineup,” defined as a comprehensive set of low-cost index options that span the global capital markets.

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Perhaps more surprising is participants’ willingness to take investment risk through passive investments. Factoring in index-based target-date funds (TDFs), a strong majority (82%) of participants serviced by the firm held some form of equity index investment as of year-end 2014.

Vanguard suggests key high-level metrics of aggregate savings behaviors—such as median and average deferral and contribution rates—remained steady across the client base in 2014. But the firm “sees encouraging signs with respect to the number of participants saving at double-digit rates,” says Jean Young, lead author of the report and a senior research analyst with the Vanguard Center for Retirement Research. “About half of participants in Vanguard-administered defined contribution plans are saving 10% or more.”

However, the study also found that in plans with automatic enrollment, more than 60% enroll at default rates of 3% or less, so there is significant ground yet to cover. Vanguard says its data clearly demonstrates auto-enrollment boosts participation rates, but it can lead to lower contribution rates when default deferral rates are set at too-low levels. The study recommends a target savings rate of 12% to 15%, including employer match.

“Plan sponsors are playing a more assertive role in shaping participant outcomes, and we commend them for their diligent efforts in designing, overseeing and continually improving their plans,” adds Martha King, the newly announced head of Vanguard’s Institutional Investor Group. “At the same time, we share with our sponsor clients an obligation to move the dial on savings rates, and give participants the best chance for investment success.”

Additional findings from the research can be explored here.

Participants June 11, 2015

Millennials Have Financial Priorities Ahead of Retirement Saving

Forty-five percent of “younger” respondents to a recent survey said they have student loan debt.
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The latest Allstate/National Journal Heartland Monitor Poll finds 32% of “younger” Americans believe paying off credit card and student loan debt is the best use of the money they have right now.

The survey classified respondents into two groups, including “younger” Americans who are ages 18 to 24 and those ages 25 to 29 who answered that they were still “getting started” in life.  “Older” Americans are age 30 and older and those ages 25 to 29 who did not consider themselves to be still getting started.

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There were several other financial priorities that ranked above saving for retirement for younger survey respondents. Twenty-one percent said building an emergency financial fund is the best use of their money, while 15% selected “saving ahead for major purchases like a car,” 14% chose “saving to buy a home or paying off a mortgage,” and 10% picked “investing in a retirement account.”

Forty-five percent of younger respondents indicated they have student loan debt compared to 28% of older respondents who had student loan debt when they were first getting started.

When it comes to saving for retirement, investing and managing debt, nearly half of younger respondents (46%) indicated they know what they should be doing and they are following a plan. But, more than one-third (36%) said they know what they should be doing, but can’t afford it, and 15% said they don’t know what they should be doing financially.

Asked what would be the most helpful source of financial advice, half of younger participants said financial education in public schools, and more than one-quarter said financial education classes in the community. Only 12% said a professional financial adviser would be the most helpful source of financial advice, and only 6% chose their employers.

The most common “ideal age to retire” selected among younger respondents was age 60 to 65, selected by 43%. One third think they will be able to retire in this age range, while 34% expect to retire at age 65 or later. Nine percent said they expect to never retire.

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