Vanguard’s How America Saves 2017 was released in June. And as I’ve said before, for these plans to work, people only need to get two things right: they need to save enough and they need to invest appropriately. Today I want to focus on saving trends.
Over the past 15 years, plan participation rates have improved from 65% in 2000 to 79% in 2016. That’s a rise of more than 20%. Put differently, more than 20% additional people are saving for retirement in these plans today than were saving just 15 years ago. That’s huge!
All of this improvement is from plan sponsor adoption of automatic enrollment.It’s striking to me that participation rates for people in plans with voluntary enrollment are pretty much the same today as they were back in 2000. This isn’t surprising. We know people anchor at certain saving rates in these plans. Zero is often the anchor in voluntary designs due to inertia or procrastination. The default deferral rates in automatic enrollment designs are also powerfully sticky.1
Participation rates rising due to adoption of automatic enrollment
*Data on participation and deferral rates is drawn from a subset of Vanguard recordkeeping clients for whom we perform nondiscrimination testing. Selected plan design features are also derived from this data. For the 2016 analysis, the subset is composed of plans that complete their testing by March and represents approximately one-third of the clients for whom we perform testing. Plans that complete their testing by March generally have lower participation rates and generally include plans with concerns related to passing testing. When all plans have completed their testing by the end of 2017, the participation rates improve. Plan design features derived from this data also improve. Interestingly, the deferral rates do not change significantly. Based on the trends experienced over the prior three years, we have estimated participation rates for 2016. The estimations use a combination of linear extrapolation and subjective estimation. The same approach is applied to plan design features derived from this data. We will continue to restate these results in the following year based on the final compliance testing results.
Not only are more plans adopting automatic enrollment, but plan sponsors with automatic enrollment are implementing stronger savings rate defaults. In 2016 nearly half of plan sponsors defaulted participants at 4% or more—double what it was 10 years ago. And 20% of plan sponsors defaulted participants at 6% or more—three times what it was 10 years ago.
These stronger defaults, coupled with automatic annual increases, are leading to converging deferral rates in voluntary and automatic enrollment plans. Five years ago the deferral rate was 40% higher in voluntary enrollment plans than in automatic enrollment plans. Now these deferral rates are neck and neck at 6.3% and 6.1%, respectively. Importantly, throughout this period, total savings rates (employee plus employer contributions) have also remained steady at 10% to 11%.
So, at the end of the day, the more things change, the more things stay the same. We have more than 20% more people saving in these plans—a huge change for the better. At the same time, the total savings rate has stayed the same.
1 Vanguard, Automatic enrollment: The power of the default, 2015.
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