Vanguard: 401(k) plan auto enrollment paying off in getting more Americans to save for retirement

Largest DC plan asset manager releases annual “gold standard” retirement report

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Among 401(k) plans automatically enrolling employees, 69% now also automatically increase their contribution rate annually and invest their assets in a balanced investment option, setting up a growing number of employees—especially low-income, young, and minority workers—for healthier retirement savings, Vanguard researchers said today.

“401(k) and other defined contribution plans have enabled millions of American workers to accumulate savings for retirement. Automatic programs have played a key role in this success,” said Jean Young of Vanguard’s Center for Retirement Research and lead author of How America Saves 2014, Vanguard’s annual report on investor trends in the 401(k) and other defined contribution retirement plans that it administers.

According to the report:

Automatic enrollment is making a significant impact. 34% of Vanguard plans had adopted automatic enrollment as of year-end 2013, up from 24% five years earlier. More than half of all contributing participants in 2013 were in plans with automatic enrollment. Sixty-two percent of employees participating for the first time in 2013 were in plans that had adopted automatic enrollment. While initially applied only to new hires in many plans, auto enrollment is increasingly used for eligible nonparticipants in half of those plans. Automatic enrollment also substantially increases plan participation among low-income workers, young workers, and minorities. Employees who joined their plan through automatic enrollment had an overall participation rate of 82%, compared with a participation rate of 65% for employees who joined through voluntary enrollment.

Most auto enroll plans also automatically increase contribution rates, but some not enough. Of auto enrollment plans, 69% automatically increase their participants’ contribution rate annually. Another 29% do not. Separately, 65% of auto enrollment plans automatically increase participants’ contribution rate but default them at an initial 3% or less. Vanguard recommends that a typical participant target a total contribution rate of 12% to 15%, including both employee and employer contributions.

Target-date funds are the automatic investment choice for nearly all auto enroll plans. 98% of auto enrollment plans use a target-date fund (TDF), other type of balanced fund, or managed account as the default investment. Nine in 10 choose a target-date fund.

In 2013, 40% of participants were solely invested in an automatic investment program, compared with 22% at the end of 2008. Of those, 31% were invested in a single TDF, another 6% held a balanced fund, and 3% used a managed account program. These options can dramatically improve portfolio diversification compared with participants making choices on their own. With the growing use of target-date funds, Vanguard anticipates that 58% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed option by 2018.

“A quarter of Americans are estimated to be partially prepared for retirement but need help getting the rest of the way. Another quarter are thought to be at risk for not being able to save enough for retirement altogether. Employers can do more to help both of these groups by enhancing their plans with features like automatic enrollment, annual saving increases, and balanced default investment options,” Ms. Young said.

She also pointed to another emerging plan design strategy called “reenrollment,” in which plan sponsors address portfolio construction issues by moving participants into investments such as target-date funds, balanced funds and managed accounts.

Other highlights of the report:

The average participant account balance was $101,650 in 2013. Among continuous participants—those with a balance between both year-end 2008 and 2013—the median account balance rose by 182%, reflecting both the effect of ongoing contributions and market returns during this period. "Balances are now well ahead of the peak levels achieved prior to the global financial crisis. The effects of the market decline on retirement savings are now firmly in the past," Ms. Young said.

Given the growing focus on plan fees, more plans are offering a wider range of low-cost index, or passive, funds. In 2013, nearly half of Vanguard plans offered an index core, which is a comprehensive set of low-cost index options that span the global capital markets. Large plans have adopted this approach more quickly, resulting in about 60% of all Vanguard participants offered an index core. Factoring in indexed target-date funds with their equity and fixed income mix, 84% of participants hold equity index investments.

How America Saves is based on an analysis of Vanguard’s direct full-service recordkeeping plans. Along with looking at the overall retirement saving and investing behavior of Vanguard’s more than 3 million participants, How America Saves also includes supplemental reports on participant patterns in the DC retirement plans of 12 industries.

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.

About Vanguard

Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies. As of May 31, 2014, Vanguard managed more than $2.6 trillion in U.S. mutual fund assets. Vanguard offers more than 160 index and actively managed funds to U.S. investors and more than 100 additional funds in non-U.S. markets. Vanguard provides investments to more than 5,100 defined contribution plans, including full-service recordkeeping and investment services to 3.6 million participants. Vanguard is also a major provider of investment and other services to defined benefit plans. For more information, please visit

For more information about Vanguard funds, visit, or call 800-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risks, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.

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