Sponsors of defined contribution plans have increased the use automated features in those plans over the past 10 years as they seek to boost plan participation rates, saving rates and balanced asset allocation strategies.
That’s according to Vanguard’s study of DC plans, How America Saves 2017, which also finds that, in addition to the use of such features as auto-enrollment and auto-escalation and the use of target-date funds as qualified designated investment options, during 2016 there have also been steady sponsor contributions—another means of improving participant outcomes.
In fact, 97 percent of participants were on the receiving end of an employer-matching contribution last year. According to the study, when nonmatching contributions are also taken into account—which can be structured as variable or fixed profit-sharing contributions, or employee stock ownership plans—94 percent of sponsors offered some sort of employer contribution, benefitting 98 percent of participants in aggregate.
The study finds that close to half of plans now use automatic enrollment, which represents 300 percent growth of this feature over the past 10 years. That’s led to a much higher participation rate, since plans with automatic enrollment exhibit a 90 percent participation rate.
When compared with voluntary enrollment, the difference is clear, since voluntary plans are still stuck at their 10-year-old participation rate of 63 percent.
Considered as an aggregate, across all plans, the average participation rate last year was 79 percent, up 16 percent from 2007.
The increase in default deferral rates added by sponsors is also showing improved savings. Over the last decade, plans with default deferral rates of 4 percent or more have doubled to 48 percent, while plans with a default savings rate of 6 percent or higher have nearly tripled to 20 percent.
Two-thirds of automatic enrollment plans have now implemented automatic annual deferral rate increases, and that nudges savings rates higher by one to two percentage points each year.
In a statement, Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of the study, says, “When auto features were first introduced, there seemed to be some hesitancy from plan sponsors to default participants at higher rates, believing it might discourage participation. Today, more sponsors are embracing higher default rates and, importantly, we found that these higher rates are sticky.”
Last but not least, as sponsors turn to TDFs as QDIAs, extreme allocations and frequent trading in DC accounts are declining. The influence of TDFs means there’s a smaller percentage of participants investing exclusively in equities, too; that’s fallen from 17 percent in 2007 to 6 percent in 2016.
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