doption of defined contribution plan features such as target date funds, automatic enrollment and automatic escalation and helped more participants save for retirement and stay focused on the long term, even in the wake of last year’s unprecedented market turmoil, according to Vanguard’s most recent edition of How America Saves.
According to the report, 95% of plans offered target date funds — which offer a risk-adjusted, all-in-one portfolio solution — at the end of 2020, up 13 percentage points from 2011, and nearly all Vanguard participants were in plans that offered them.
Eighty percent of all participants used target date funds, with two-thirds having their entire account invested in just one.
The report said participants’ increasing use of target date funds led to a 75% decrease in extreme equity allocations among participants over the last 15 years.
Target date funds tamped down frequent trading. Only 4% of participants holding a single target date fund made a trade last year.
According to the report, automatic enrollment helped employees save 50% more for retirement than those at companies offering voluntary enrollment.
Annual automated deferral increases resulted in participants saving 20% to 30% more after three years than employees without automatic increases.
Data came from 1,700 qualified plans, 1,400 clients and 4.7 million participants for which Vanguard directly provides recordkeeping services.
Improving Participant Outcomes
A supplementary report rolled out last year, Insights to Action, offered plan design recommendations to improve participants’ outcomes.
The latest supplement encourages plan sponsors to focus on four key areas, which combined can meaningfully improve participation and savings rates and keep participants on track for retirement.
Automatic features. Vanguard recommends implementing automatic enrollment with automatic annual increases, defaulting participants at 6%, or at least to the employer match, and performing reenrollment, undersaver and automatic increase sweeps.
Adoption of advice. Vanguard recommends offering advice and guidance, but not before considering the fees, features and value of an advice offer.
Retiree-friendly policies. Vanguard recommends allowing installments and flexible withdrawals for retirees, providing valuable modeling and spending tools, and offering an advice option that includes solutions regarding retirement income.
Loans and withdrawals. Vanguard says accessing retirement funds in an emergency should be a last resort, but also that plan sponsors should consider reasonable rules to balance participants’ needs with the goal of preserving plan assets for retirement. It recommends the following:
- Limit participants to one loan outstanding at a time.
- Consider plan savings sweeps to help participants who may have accessed assets in 2020.
- Set minimum limits for hardship withdrawals, restricting withdrawal frequency to twice per year.
- Set a “cooling off” period of 30 days to six months between loan payoffs and taking a new loan.