Growth in employee 401(k) plan contributions in 2023 was ‘extraordinary’: Vanguard

Despite an uncertain economic environment, retirement plan participant outcomes thrived in 2023, bolstered by strong growth in employee contributions, according to a preview of Vanguard’s newest analysis of retirement saving behavior.

“How America Saves 2024,” Vanguard’s 23rd edition of the annual report, will be available in June, but a six-page preview of the report detailed key trends surrounding retirement saving and how plan sponsors can respond to them and continue to optimize plan design to best serve plan participants.

“Our initial data highlights that participants generally remained resilient through 2023,” according to the report preview. “While there were a few signals of a possible uptick in financial stress, overall, participants’ retirement plan behavior remained in line with previous years, and most continued to maintain a long-term view.”

Three positive retirement trends stand out in this year’s report, according to Vanguard.

Retirement trend #1: Automatic enrollment plan design at record high

Vanguard’s report finds several indicators of improving trends in plan design at the end of 2023, according to the preview. Those indicators include that 59% of Vanguard 401(k) plans that allow employee elective deferrals had adopted an automatic enrollment design, and 77% of the plans with at least 1,000 participants used the feature. In addition, 60% of plans with an automatic enrollment design defaulted employees into the plan at 4% or higher – a figure that continues to go up every year. Almost 7 in 10 plans automatically enrolled employees into an annual escalation feature that increases their deferral percentage.

Retirement trend #2: Rising account balances

Largely driven by market performance, average account balances increased by 19% in 2023. The average participant account balance had reached $134,128 at the end of 2023, and the median account balance was $35,286, a 29% increase since the end of 2022.

Retirement trend #3: “Extraordinary” rise in employee contributions

Vanguard characterized the growth in employee contributions in 2023 as “extraordinary.” That growth included 15% of participants increasing their payroll deferral percentage, and 28% of participants seeing their deferral percentage increased by an annual automatic escalation. As a result, “the 43% of participants who increased their savings is the highest that we’ve ever tracked in ‘How America Saves,’” according to the preview.

Last year’s positive trends are aligned with positive long-term signs seen through the annual report’s history.

“Growing adoption of automatic enrollment and improvement in plan designs over the last two decades has helped increase employee savings,” according to the preview. “In addition, the use of professionally managed allocations has dramatically improved participants’ age-appropriate equity exposure. From both a savings and investment perspective, using thoughtful plan designs and automatic solutions has improved participant outcomes.”

Vanguard noted that loan issuances increased by 12% in 2023, but issuance rates remain below the levels seen before the pandemic. Hardship withdrawals grew moderately from 2.8% to 3.6% from 2022, a sign that some households faced financial stress, but overall 96% of participants did not take a hardship withdrawal.

The data shows that participants are generally resilient and keep a long-term approach to retirement saving, according to Vanguard.

“Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, a modest increase isn’t surprising,” the report preview said. “And for a small subset of workers facing financial stress, hardship withdrawals may serve as a safety net that otherwise may not have been available without plan-implemented automatic solutions.”

For plan sponsors, there is still plenty of room for improvement and building on the gains that 2023 brought.

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

“Despite the progress, opportunities for improvement remain,” according to Vanguard. “Plans not yet using automatic enrollment should consider adding it. For plans with automatic enrollment, plan sponsors should monitor how quickly the plan is designed to get participants to a 12%-15% total savings rate.”

Vanguard’s report preview points to ongoing challenges that continue to stick with plan participants.

“Employees face many competing financial priorities, including student loans, paying for health care, credit card debt and establishing and funding an emergency savings account,” according to Vanguard. “Plan sponsors can help support their employees by offering cost-efficient, high-quality advice and a platform that provides guidance on financial well-being — two valuable services that can provide personalized solutions.”