Once a week in the summer, I cycle about 56 miles roundtrip to work. It’s a beautiful ride that takes me along Pennsylvania’s winding Schuylkill River and through Valley Forge National Historical Park.
I have the stamina for this trek partly because throughout the year I train with the help of an app that keeps track of my ride stats, including cadence (revolutions per minute). All cyclists should be aware of their cadence as they seek their pedaling “sweet spot” on their quest to optimize riding efficiency.
Retirement plan sponsors also should be aware of cadence. For them, the sweet spot to identify is the optimal rate for implementing planwide events in the context of smart plan design. Specifically:
- How often should you implement investment reenrollments, moving participants who may hold an age-inappropriate allocation into an age-appropriate investment such as a target-date fund (TDF)?
- How frequently should you carry out participation sweeps to capture nonparticipants or to put undersaving participants into higher savings rates?
When deciding on the frequency of reenrollments and sweeps, we generally believe that plans consider scheduling them every three years, keeping in mind that what works for one plan may not work for another. I recently encountered a couple of retirement plans that do sweeps every year. That’s atypical and probably more frequent than necessary for most plans.
Whatever the frequency, the benefits of reenrollments and sweeps are well documented.
Vanguard research shows that reenrollment into a low-cost qualified default investment alternative (QDIA), such as a low-cost target-date series, can dramatically improve diversification and reduce fees for participants. A recent update to that research suggests there will be a small number of participants who opt out of the default; however, investment defaults generally remain “sticky.”
My colleague Scott Conking also recently wrote that one plan sponsor’s use of a sweep resulted in the participation rate going from 75% to 95%, and participants saving at or above the company match rose from 59% to 91%.
PPA: Beyond the first decade
Since the Pension Protection Act of 2006 was passed into law more than ten years ago, many elements of smart plan design have grown in acceptance.
For example, automatic enrollment has grown 50% since 2010, according to Vanguard defined contribution plan data. At the end of 2016, 45% of Vanguard plans had adopted automatic enrollment. And because larger plans were more likely to offer automatic enrollment, 61% of new plan entrants were enrolled via automatic enrollment by the end of last year. Importantly, autoenrollments are generally made into TDFs, which are considered QDIAs and carry with them the associated protections.
It’s fair to say these features are now accepted as best practices, but there’s still room for more plans to adopt such smart design elements. Unfortunately, most plans currently treat reenrollments and sweeps on an ad hoc basis—if at all. These plans are missing a potential opportunity to establish a cadence that will increase participant savings rates and help with investment outcomes.
Vanguard can help plans put cadence and other plan design features into perspective, allowing you to better help your participants. We can leverage our deep experiences to provide you with guidance and ongoing support. Please don’t hesitate to reach out and consult with your Vanguard team.
I’d like to thank David Hoffman for his much-appreciated contributions to this piece.
- All investing is subject to risk, including the possible loss of the money you invest.
- 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 (stocks) to more conservative ones (bonds and short-term reserves) 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.
- The experiences of Vanguard clients described herein may not be representative of the experiences of other Vanguard clients and are not a guarantee of future investment performance or success.