Record-high 401(k) plan participation, thanks to auto-enrollment

The 22nd edition of “How America Saves,” an annual look at the savings behaviors of nearly 5 million defined contribution plan participants across Vanguard’s business, found that plan participants are saving for retirement – but many have not yet reached ideal savings rates.

John James, managing director, Institutional Investor Group, Vanguard, said Vanguard saw record highs in participation, deferral rates and the use of professionally managed allocations in 2022.

Since the passage of the Pension Protection Act in 2006, adoption of automatic enrollment has more than tripled, according to Vanguard. At year-end 2022, nearly 58% of plans and 76% of plans with at least 1,000 participants have adopted the design. Last year saw record plan participation of 83%.

“We still have work to do,” James said. “We believe participants should be saving at least 12% to 15% of their pay to meet their retirement goals. We’re not there yet — but we’re close. Twenty percent of participants need a boost of just 1% to 3% to hit their target saving rate.”

Related: The power of auto-enroll (& auto-sweep): What moves the needle in retirement savings

Here is a look at 10 key findings from this year’s report.

1. The role of automatic enrollment: According to Vanguard, automatic enrollment adoption at plans has tripled since 2007. At the end of 2022, 58% of Vanguard plans had automatic enrollment, including 76% of plans with at least 1,000 participants. In addition, 59% of plans default employees at a deferral rate of 4% or higher – compared to just 35% of plans in 2013. Of those plans with automatic enrollment, 99% defaulted participants into a balanced investment strategy in 2022.
2. Participation rates on the rise: In 2022, Vanguard’s plan-weighted participation rate was 85%, reflecting an increase of 7 percentage points since 2013. Overall, Vanguard plans with automatic enrollment had a 93% participation rate last year, compared with a participation rate of 70% for plans with voluntary enrollment.
3. Stable deferral rates: Deferral rates have remained largely level in recent years. The average employee deferral rate in 2022 was 7.4%, compared to 7.0% in 2013. When including both employee and employer contributions – and also including nonparticipants – the average total contribution rate in 2022 was 11% for automatic enrollment plans and 8% in voluntary enrollment plans.
4. The Roth option: Eighty percent of Vanguard plans offered a Roth IRA feature at the conclusion of 2022, up from 68% five years before. Ninety-four percent of larger plans offered the feature. Within the plans that offered a Roth choice, 17% of participants had elected the option versus 11% in 2017.
5. Account balances fall: Vanguard participants’ average account balances fell 20% from the end of 2021 to the end of 2022, victim to the declines in equity and bond markets during the year. The average Vanguard accounts balance amounted to $112,572, and the median balance was $27,376.
6. Professionally managed allocations: According to Vanguard, the growing use of professionally managed allocations “has been essential to improvements in portfolio construction.” The growth in participants in an automatic investment program has been especially sharp – reflecting a rise from 40% at the end of 2013 to 66% at the end of 2022.
7. Participant portfolio construction: Vanguard says participants have dramatically improved the construction of their portfolios. For instance, 79% of participants had a balanced strategy in 2022 vs. 29% in 2005, and only 3% of participants held no equities last year vs. 13% in 2005.
8. Light trading: Just 6% of Vanguard defined contribution plan participants traded within their accounts in 2022, meaning that 92% did not initiate any exchanges at all. The number was even lower – 2% – for participants holding a single target-date fund.
9. In-service withdrawals: Hardship withdrawals have grown in recent years, while non-hardship withdrawals remain steady. Hardship withdrawals reached 2.8% in 2022, up from 1.9% in 2018, while non-hardship withdrawals were 3.6%, compared to 3.4% four years before.
10. Preserving assets for retirement: Vanguard participants who separated from their jobs largely kept their assets for retirement rather than take distributions. Approximately a quarter of participants were eligible for a distribution in 2022 because they had separated from service during the year or previous years, but 81% preserved their plan assets for retirement by remaining in their old employer’s plan or rolling over their servings to an IRA or new employer plan.