Vanguard: Auto-Enrollment Continues to Boost Savings, Deferral Rates

Due to growing adoption of automatic enrollment, as well as expanded eligibility requirements and vesting schedules, average retirement savings rates rose slightly in 2023, according to Vanguard’s latest “How America Saves” report. 

In 2023, Vanguard found that automatically enrolled employees had an overall participation rate of 94%, compared with 67% for employees in plans with voluntary enrollment. 

The average deferral rate was 7.4% in 2023, which is a modest increase from 6.8% in 2014. This data only reflects the level of employee-elective deferrals, but most Vanguard plan sponsors also make employer contributions. Including both employee and employer contributions, the average total participant contribution was 11.7% in 2023. 

“Plan designs have never been stronger,” says Jeff Clark, head of defined contribution research at Vanguard. “59% of plans now have auto-enrollment design, up from 34% just 10 years ago. [For] plans that have at least 1,000 or more participants, that number goes up to 77%. Both of these [are] all-time highs.” 

Clark says if a plan’s participation rate is below 90%, it is now considered to be in the minority among 401(k) plans. He adds that participation rates among younger workers, in the 25-to-34-year age range, are now an average of 83%, up from just 74% 10 years ago, and deferral rates are about 20% higher, as well. 

In terms of trends with employer match formulas, Clark says the types of formulas being used have not changed much over the last five to six years. The most popular match type remains a single-tier formula in which the employer matches $0.50 per dollar on 6% of pay, as 69% of plans use this formula.  

Half of plans offer matching contributions only, 10% offer nonmatching contributions only and 36% offer both types of contributions, according to the report. 

In addition, more plans have started offering a Roth feature, with 82% of plans offering it at the year-end of 2023, up from 74% in 2019. Clark says the SECURE 2.0 Act of 2022 may have had an impact on the prevalence of Roth accounts, especially as it will be required for plans to offer a Roth for catch-up contributions for higher-earning employees. Participants are starting to understand some of the tax advantages of Roth as well, Clark says.  

Plan eligibility has also shown improvements, as nearly three in four Vanguard plans allowed employees to make voluntary contributions immediately after they joined their employer last year. Nearly half of plans also immediately vested participants in employer matching contributions, and half of all participants were enrolled in these plans.  

Despite these positive participation and savings numbers, Vanguard also found that in-service withdrawal activity and hardship withdrawals increased slightly from 2022 to 2023. For example, 3.6% of participants initiated a hardship withdrawal, up from 2.8% in 2022. Still, more than 96% did not take a hardship withdrawal in 2023. 

“One of the main reasons why participants are taking hardship withdrawals now is to avoid foreclosure [on] a home, so that does point to there being some financial strain within households,” Clark says. 

But he says it is also important to remember that it’s easier to request a hardship withdrawal now, especially with new provisions from SECURE 2.0 that allow for more flexibility. 

“Having hardship withdrawals tick up a little bit may not necessarily be that surprising,” Clark says. “And in a way, it is kind of offering somewhat of a safety net for those households if they run into a financial emergency.” 

Another finding from the report is that about one-quarter of participants could have taken a distribution because they had left their jobs, most of these participants (82%) continued to preserve their plan assets for retirement by either remaining in the plan rolling over their savings to an IRA or their new employer’s plans. In terms of assets, 97% of all plan assets available for distribution were preserved and only 3% were taken in cash. 

Vanguard found that plan sponsors are continually looking for ways to keep retirees in the plan. In 2023, 67% of plans allowed retirees to take distributions in installments, and 40% of plans allowed for partial withdrawals, up from 27% in 2018. 

However, new data from the Defined Contribution Institutional Investment Association revealed that 73% of firms charge fees on partial or ad-hoc withdrawals, and 47% charge fees on installment payments or systematic withdrawals. 

Overall, Clark says the power of auto-enrollment is a main takeaway from this year’s “How America Saves” report and that it is a significant driver in helping, especially younger, workers save, as well as improve worker retirement savings in general. 

“[With] more plan sponsors offering auto-enrollment, certainly [because of] SECURE 2.0 and new plans being mandated to have auto-enrollment, I think we’re just going to continue to see that trend increase, which is definitely positive,” Clark says. 

Vanguard drew data from over 1,500 qualified plans and nearly five million participants for which Vanguard directly provides recordkeeping services. The universe of plan sizes ranged from under 500 participants to more than 5,000.