Professionally managed retirement accounts were the hot 401(k) trend in 2011, according to Vanguard's "How America Saves 2012" report. It found that 33 percent of all Vanguard 401(k) plan participants invested their entire account balance in either a single target-date fund (TDF) or balanced fund or through a managed account advisory service.
Of those, 24 percent invested in a single TDF; 6 percent invested in a single traditional balanced fund; and 3 percent invested in a managed account advisory program. In 2005, only 9 percent of Vanguard's 401(k) plan participants invested in managed retirement accounts.
According to the report, these options have become more popular because they improve the diversification in a retirement portfolio, which reduces the risks associated with having too much exposure to equities and market volatility or too little. In 2011, 18 percent of Vanguard participants took an extreme position in equities, holding either 100 percent in equities (10 percent) or no equities (8 percent). In contrast, a total of 34 percent of participants held extreme equity positions in 2005.
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"Some question the benefits of 401(k) plans because they transfer investment decision-making to generally inexperienced participants," said Jean Young, chief author of 'How America Saves.' "Now, however, an increasing number of participants can leave the asset allocation, investment selection and ongoing management responsibilities of their account to the professionally managed allocation options available in their DC plans."
Only 28 percent of plan sponsors offered target-date funds in 2005. In 2011, that number rose to 82 percent. Forty-seven percent of all participants use TDFs. Some of that growth can be attributed to the fact that many plans automatically enroll all participants in a TDF, but many participants are voluntarily choosing to put their money in a TDF, the report said.
Vanguard believes the surge of TDF usage will continue to influence the adoption of professionally managed allocations.
"Largely because of the growing use of target-date options, we anticipate that 55 percent of all participants and 80 percent of new plan entrants will be entirely invested in a professionally managed allocation by 2016," Young said.
Vanguard also found that participation rates stayed the same from 2010 to 2011, staying at 76 percent. More plans are offering automatic enrollment features, which will help increase those participation numbers. In 2011, 29 percent of Vanguard plans had adopted automatic enrollment, up 2 percentage points from 2010. Employees in plans with an automatic enrollment feature had an 80 percent participation rate compared to only 60 percent of employees in voluntary enrollment plans.
Seven in 10 auto enrollment plans have implemented automatic annual deferral rate increases, up from three in 10 in 2005.
The report also found that the average deferral rate rose to 7.1 percent and the median was unchanged at 6 percent. The aggregate average plan savings rate, including both participant and employer contributions, was 10.4 percent in 2011. Vanguard believes investors should save 12 to 15 percent or more.
The median account balance of participants rose by 10 percent from 2010 to 2011. Eight in 10 of these participants saw balance increases because of conservative asset allocations and ongoing contributions. In 2011, the median participant account balance was $25,550 and the average was $78,296.
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world's largest investment management companies. Vanguard manages approximately $1.8 trillion in U.S. mutual fund assets, including nearly $200 billion in ETF assets. Vanguard offers more than 170 index and actively managed funds to U.S. investors and more than 70 additional funds in non-U.S. markets.
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