Taking 401(k) plan design to the next level

In a testament to plan sponsors’ desire to implement smart plan design, pension plan participants broke new savings records in 2021, but there’s still a long way to go, according to Vanguard’s latest edition of How America Saves.

The company notes that it has seen record participation and carryover rates as well as a higher percentage of participants in target date funds (TDFs) and advised solutions such as managed accounts than ever before. Yet while employers have made significant progress in adopting plan design features, the firm observes that many plan members face increasingly complex financial situations that can jeopardize their retirement savings efforts. .

In fact, the company’s 110-page analysis of nearly five million 401(k) accounts registered by Vanguard, along with the companion piece Insights to Action, illustrate several areas of improvement that plan sponsors can address to further improve participants’ results and optimize their diet. pattern.

“There is no doubt that the efforts of plan sponsors over the past two decades have helped improve retirement preparedness for millions of Americans,” said John James, managing director and head of Vanguard Institutional Investor Group. “However, the needs of workers are changing and so are plan designs. Plan sponsors are uniquely positioned to support the financial well-being of their employees with integrated tools, guidance and services that can help improve their overall financial peace of mind.

Automatic Savings Features

Thanks to automatic deferrals and increases, savings rates have remained stable. Indeed, by the end of 2021, 56% of Vanguard plans had adopted automatic enrollment, including 75% of plans with at least 1,000 participants. And because larger plans were more likely to offer it, 70% of participants were in plans with an auto-enrollment option.

In addition, two-thirds of auto-enrollment plans have automatic annual deferral rate increases in place. Auto-registration defaults have also increased over the past decade. Fifty-eight percent of plans now default to employees at a deferral rate of 4% or more, up from 32% of plans in 2012, the report notes. And nearly all plans (99%) with auto-enrollment defaulted to a balanced investment strategy in 2021, with 98% choosing a default TDF.

Nonetheless, savings levels may still be insufficient for retirement readiness, the report suggests. The median total contribution rate, which includes both member and employer contributions, was 10.4% in 2021, up slightly from 10% in 2017.

However, about half of all participants continue to save below the recommended savings rate of 12% to 15% or more of their salary to meet their retirement goals. “The good news is that about 20% of participants are between 1% and 3% of their target savings rate, so minor behavioral adjustments could benefit many of them,” James points out.

To address this issue, the report suggests that plans consider participants default to 6%, or at least employer match, and perform re-enrollment, auto-escalation, and under-savings sweeps. Regarding concerns about opt-out options, Vanguard research suggests that employee quit rates do not appear to vary in response to the plan sponsor’s choice of initial deferral rate, whether for example, 3% or 6%.

Professionally Managed Portfolios

Vanguard further suggests that plan sponsors consider expanding the reach of retirement plans to support participants’ financial well-being with self-directed solutions and advice that go “up to and during retirement.” The report observes, for example, that TDFs and other professionally managed allocations have improved portfolio construction and reduced frequent trading and extreme stock allocations among participants by three-quarters since 2006.

At the end of 2021, 64% of all Vanguard participants were solely invested in an automatic investment program, compared to 7% at the end of 2004 and 36% at the end of 2012. Additionally, 56% of all participants were invested in a single TDF; another 1% held another balanced fund; and 7% used a managed account program. Yet more than half of participants over 55 remain self-directed investors, leaving some savers vulnerable to significant portfolio volatility.

“These diversified, professionally managed investment portfolios significantly improve diversification compared to the portfolios of participants who make their own choices,” Vanguard points out.

Additionally, the company notes that over the past 15 years, it has observed a decline in participant trading, which is in part attributable to increased adoption of TDFs by participants. Only 3% of participants holding a single TDF traded in 2021, according to data from the firm. As such, the report suggests using a QDIA and choosing TDFs as the default option, as well as re-enrolling participants in TDFs by grouping them into an appropriate TDF, which will help ensure wallets are fit for purpose. age and properly diversified.

Collections and job changes

As participants change jobs more frequently and risk having their retirement savings cut short, Vanguard suggests that plan sponsors work to ensure that participants’ savings efforts continue unabated throughout. of their career.

The report notes that withdrawals disproportionately affect younger, low-balance participants. Most participants with 401(k) balances under $1,000 are voluntarily or automatically withdrawn from their retirement savings when they leave an employer, compared to only 7% of participants with balances over $100,000.

Members who cash out their retirement savings prematurely risk immediate tax consequences and may lose future savings and returns if the assets are not reinvested in a tax-sheltered account. Vanguard suggests that autoport services and revisions to minimum balance rules can help lower withdrawal rates. In fact, a patch in the SECURE Act 2.0 would update the dollar limit for mandatory distributions.

To help improve retirement readiness, the report encourages plan sponsors to consider adopting plan design features, such as higher default rates, immediate eligibility and vesting, and integrated benefits services. – be financial. He notes, for example, that almost a third of plan sponsors require employees to work at the company for a period of time before being eligible to contribute to their pension plan.

The data included in this report is drawn from multiple sources, including Vanguard’s DC Universe, comprised of 1,700 qualified plans, 1,400 customers, and nearly 5 million participant accounts for which Vanguard directly provides recordkeeping services. registers. In addition, participation and deferral rate data is drawn from a subset of Vanguard’s record keeping customers. Unless otherwise stated, all references to data are as of December 31, 2021.

Abdul J. Gaspar