Helping plan sponsors ensure their participants are adequately prepared for retirement is one of the true privileges I have in my role as head of Retirement Plan Client Services in Vanguard Institutional Investor Group. My team and I have the opportunity to meet with clients and see firsthand the sense of purpose and initiative that sponsors take to help their participants achieve sustainable retirement income.
I want to share with you an example of how a plan sponsor improved participant outcomes. This occurred recently when a large manufacturing client of ours boosted deferral rates and overall retirement readiness among its participants by taking a few simple steps, including:
- An annual sweep of nonparticipants into an age-appropriate Target Retirement Trust every year at 5% of pay.
- Maximizing the company match dollar for dollar on the first 3% of pay and 50 cents on the dollar for the next 2%.
- Raising the cap on autoescalation from 10% to 15%.
Within six months of these changes, the manufacturer’s participation rate jumped to close to 100% and the percentage of participants deferring at least 5% (9% including the company match) rose to 96%. And because the company swept participants into an age-appropriate Target Retirement Trust, asset allocations also improved.
What’s at stake
Plan sponsors have largely succeeded in boosting participation rates and achieving better portfolio construction among their participants. A big factor in these achievements has been new plan design features, such as automatic enrollment, as well as the increased adoption by participants of balanced portfolios, such as target-date funds.
But when it comes to moving the dial on savings rates, the adoption of automatic enrollment, specifically the predominant use of a 3% default deferral, means many participants may be saving less. Participants joining a plan under an automatic enrollment feature have an average deferral rate of 6.8%, a decline over the past decade when the average participant deferral rate was 7.3% in 2007.
Overall, taking into account both employee and employer contributions, the average total participant contribution rate in 2015 was 9.5% (Figure 1). And when eligible nonparticipants with 0% contribution rates are included, the average contribution rate is just 6.5%, well below the 12%–15% (including both employee and employer contributions) that Vanguard recommends the typical participant should target.
Figure 1: Aggregate participant and employer contribution rates have fallen
Vanguard defined contribution plans permitting employee-elective deferrals
Note: The previously reported average and median aggregate contribution rates for 2014 were 7.6% and 6.2%. The 2015 participation rates are drawn from a subset of plans that had completed nondiscrimination testing by March 2016 and represents approximately half of the clients for whom we perform testing. When testing has been completed for all plans, the data is restated. Plans that complete testing by March generally have lower participation rates and include plans with concerns related to passing nondiscrimination testing. The previously reported plan- and participant-weighted participation rates for 2014 were 76% and 67%.
Source: Vanguard 2016.
Clearly, our manufacturing client’s resourcefulness and willingness to address this critical challenge is helping to achieve savings adequacy for its participants. Because of these changes, more of this client’s participants are on their way to achieving the 12%-15% savings rate that Vanguard recommends. And as more and more of this company’s participants are autoescalated at higher rates, we expect the number of participants to achieve retirement savings sufficiency to increase in the future.
This story illustrates why it’s so important that plan sponsors and Vanguard continue to partner together. Higher savings rates are crucial to achieving retirement readiness. Together, we can help participants accumulate the wealth they’ll need to sustain them during retirement.
- All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.