More Employees Saving for Retirement Since PPA Passage

In large part due to automatic retirement plan design features, aggregate participation rates are higher than ever and continue to rise, according to Vanguard’s 15th anniversary edition of its How America Saves report.

Since this year marks the 10th anniversary of the Pension Protection Act (PPA), Vanguard’s report includes findings that reflect the impact of the law on improving plan construction and participant investing behaviors in defined contribution (DC) plans over the past decade. For example, among its provisions, the PPA enabled the automatic enrollment of workers into 401(k) plans at a default savings contribution rate, as well as the auto escalation of workers’ contribution rates on a periodic basis. As of year-end 2015, 41% of Vanguard plans had adopted automatic enrollment, up from just 10% of plans a decade ago. Of those plans, 70% featured automatic annual increases.

Last year, 63% of new Vanguard participants were hired under automatic enrollment, versus 12% in 2006. In 2015, three-quarters of eligible employees participated in their employer’s plan, up from two-thirds ten years ago.

The PPA also sanctioned the use of target-date funds as a qualified default investment alternative. Target-date fund use has nearly doubled since the passage of the PPA, with 90% of Vanguard plan sponsors offering target-date funds at year end 2015. In aggregate, 98% of participants now have access and 70% of participants use target-date funds.

“Target-date funds are, without question, a game changer and one of the most important elements of the 401(k) evolution,” says Jean Young, lead author of How America Saves. “As defined contribution plans evolved, it was clear that many workers were not going to serve as their own investment manager. As a result of the rise of target-date funds, we’ve seen dramatic improvements in the portfolio construction of 401(k) participants.”

Looking ahead to the next decade of the post-PPA era, How America Saves data points to key areas needing improvement. In particular, the rise of automatic enrollment has had an inverse effect on deferral rates. Nearly three-quarters of plans default at participant at savings rates of 4% or less. Automatic enrollment boosts participation rates, but it can lead to lower contribution rates when default deferral rates are set at insufficient levels.

According to the report, high-level metrics of participant savings behavior remained steady in 2015. The plan participation rate was 78% in 2015. The average deferral rate was 6.8% and the median was essentially unchanged at 5.9%. However, average deferral rates have declined slightly from their peak of 7.3% in 2007.

The rising adoption of automatic enrollment also results in a growing number of smaller balances. In 2015, the average account balance for Vanguard participants was $96,288; the median balance was $26,405. In 2015, Vanguard participants’ average account balances declined by 6% and median account balances fell by 11%.

“Plan sponsors—and the industry as a whole—must bear the responsibility to continue the significant progress impelled by the PPA, including driving improved savings rates for all participants,” says Martha King, managing director of Vanguard’s Institutional Investor Group.