Vanguard Finds Positive Savings Behaviors by DC Plan Participants

Despite volatile U.S. equity markets in 2018, with the market declining by 6%, only 8% of participants in defined contribution (DC) plans served by Vanguard made one or more portfolio trades or exchanges during the year. The number of participants holding more than 20% of their account balance in company stock fell to 19%, down from 30% in 2009.

Jean Young, lead author of “How America Saves 2019” and senior research associate with the Vanguard Center for Investor Research, tells PLANSPONSOR that it is these balanced accounts, the fact that people generally tend to only look up their balances when they receive their quarterly statements, and their ongoing contributions, that keep investors in the markets during periods of volatility. Young also says that within the next month, Vanguard will be releasing a report looking at investors’ behavior during periods of market volatility.

In 2018, 33% of participants could have taken a distribution due to separation of service in the current or prior year, but 81% of these participants kept their assets either in the current plan, in a new plan through a rollover, or by moving the assets into an individual retirement account (IRA). In terms of assets, 96% of all assets available for distribution were preserved, and only 4% were taken in cash.

Young says people tend to take distributions when the plan only permits lump-sum distributions. Because plan sponsors typically negotiate much lower investment fees than people can obtain on their own, Vanguard is encouraging all of the retirement plan sponsors it serves to adopt ad hoc distribution options, to encourage people to remain invested in the plans after retiring.

“Plan design is undoubtedly the most powerful tool to drive improved savings behavior, but it is all the more promising to see participants taking positive steps on their own to secure their financial future,” Young says. “The trend toward preserving retirement savings upon separation of service is especially encouraging, as it shows participants are thinking long-term.”

The increased use of automatic savings features has helped more employees save at near optimal levels, and save more effectively, according to the research report. At year-end 2018, 48% of Vanguard plans had adopted automatic enrollment, and 66% of new entrants were enrolled via automatic enrollment. Forty percent of contributing participants in 2018 joined their plan under automatic enrollment.

Ninety-nine percent of all plans with automatic enrollment paired that with a balanced investment strategy, with 98% choosing a target-date fund (TDF) as the default.

Including both employee and employer contributions, the average 15-year total contribution rate in 2018 was 10.6%, while the median was 9.8%. Sixty-six percent of plans that use automatic enrollment pair that with automatic escalation.

At year-end 2018, 52% of all participants were invested in a single target-date fund (TDF), 3% in a balanced fund and 4% in a managed account program. Vanguard expects that by 2023, 80% of Vanguard participants will be enrolled in a professionally managed allocation. By year-end 2018, only 9% of participants have taken an extreme position, holding either 100% equities (6% of participants) or no equities (3%).

Ninety percent of plan sponsors offered a TDF at year-end 2018, up one-third from year-end 2008. Ninety-seven percent of Vanguard participants are in plans that offer TDFs, and 77% of participants use TDFs.

At year-end 2018, 71% of Vanguard plans had adopted the Roth feature, and 11% of participants were invested in such plans. In 2018, the average account balance was $92,148 and the median balance was $22,217. As more new plans with small balances converted to Vanguard in 2018, the average account balances declined by 11% in the year and the median account balances were down 16%.

In 2018, 13% of participants had an outstanding loan, down from 17% in 2014. The average balance was $9,900.

“Our research has shown plan sponsors have a continued commitment to improving plan design for participants which has led to positive results: increased participation, savings rates and improved portfolio construction,” says Martha King, managing director of Vanguard’s Institutional Investor Group. “Moreover, the greater adoption of target-date funds signals a shift in responsibility as participants’ investment decisionmaking is increasingly moving toward employer-selected investment and advice programs. We are actively using this research and other participant data to better understand the individual behind every financial decision in order to drive better retirement outcomes.”