Here is a look under the hood of Vanguard’s record-keeping business, and 10 trends plan sponsors and advisors may want to note.
There is no disputing that the massive flows of cash from actively managed mutual funds over the past five years have been driven by the Vanguard name.
All told, Vanguard manages over $4 trillion. Over the past three years, nearly $825 billion has flowed into Vanguard funds. By comparison, the rest of the mutual fund industry captured $97 billion in the same period.
Vanguard’s dominance in the retail investor market has translated to growth in its defined contribution record-keeping business.
The number of plans with at least $20 million in assets that Vanguard services actually dipped over the past five years. In 2016, Vanguard serviced 1,900 plans of at least that size, compared to 2,000 in 2012.
But when measured by number of participants, the Valley Forge, Pennsylvania-based firm, which is the fourth largest DC recordkeeper with about $393 billion in assets under management, has seen considerable growth.
According to the 2017 How America Saves report, Vanguard was the recordkeeper on 4.4 million participant accounts in 2016, up from 3.4 million in 2012—or about a 30 percent increase over a five-year period.
While Vanguard’s dominance of the target-date fund space continues to expand—it holds more than 30 percent of all TDF assets—the firm’s record-keeping unit is still separated by some distance from Fidelity, the DC world’s largest service provider with $1.5 trillion in record-kept assets.
Let's take a look at those trends:
1. By 2021, three quarters of Vanguard participants will be solely invested in automatic investment programs.
At the end of 2016, more than half of Vanguard participants were solely invested in what the firm calls an “automatic investment program”—a TDF, balanced fund, or a managed account, the three qualified default investment alternative options established under the Pension Protection Act of 2006.
At the end of 2007, just 17 percent of Vanguard participants were exclusively invested in a QDIA option. Today, TDFs dominate the three QDIAs—46 percent of all Vanguard participants are exclusively invested in a TDF, with another 4 percent and 3 percent exclusively invested in a managed account or balanced fund, respectively.
By 2021, Vanguard is predicting that 75 percent of its participants will be solely invested in an automatic investment program.
2. Virtually every sponsor client offers a TDF.
Nine in 10 of the approximately 1,500 plans sponsors that use Vanguard’s platform offer a TDF.
And 97 percent of the participants serviced by Vanguard are in plans that offer a TDF. About three quarters of participants use a TDF for at least a portion of their savings strategy, with two-thirds of that group invested entirely in a single TDF.
3. Auto-enrollment is driving trends, but personal choice affects TDF market too.
Sponsors’ ability to default participants into TDFs has been that market’s greatest catalyst.
But participant choice still factors large in the Vanguard universe. Half of Vanguard’s TDF investors choose the funds on their own—not through default.
4. Auto-enrollment is negatively impacting deferral rates.
As other 401(k) analysis has indicated, the trend of automatic enrollment, largely a positive phenomena for the country’s retirement landscape, seems to negatively impact deferral rates in the Vanguard universe.
The average deferral dropped in 2016 to 6.2 percent of salary, from 6.9 percent in 2015. Vanguard’s report says that is directly attributable to increased adoption of auto-enrollment.
By the end of 2016, 45 percent of Vanguard plans had adopted auto-enrollment, up from 41 percent in 2015.
The average voluntary participant deferral was 6.3 percent, compared to 6.1 percent when participants were automatically enrolled in plans.
5. Avg. contribution rate is near 11% when accounting for employer match.
When factoring for employer matches, the average contribution rate held steady at about 10.9 percent.
Almost one in five participants contributed more than 10 percent on their own, and 10 percent of participants contributed $18,000, or the statutory limit.
6. These have been good years for 401(k) investors.
It’s been a good time to be a 401(k) investor over the past five years, thanks to a long bull market in equities. Stocks rose 10 percent in 2016.
The average account balance was nearly $96,500. The average contribution was allocated mostly to equities—about 75 percent.
The average total return rate was 8.3 percent in 2016. The only negative year of the past five was 2015, when the average total return was -0.4 percent. Average total return was 20.4 percent in 2013; 12.4 percent in 2012; and 7 percent in 2014.
7. The majority of plans allow immediate participation.
In 2016, 67 percent of plans allowed participants immediate eligibility to contribute to plans, and 54 percent of employer plans made matches immediately available.
Nearly half of employers had no vesting period requirement for employer matches.
8. Match design can vary.
Vanguard administered more than 200 matching formulas among its sponsor clients.
Most employers are pitching in: 94 percent of plans offered a matching contribution only, a non-matching contribution only, or a combination of the two. The favored form was a matching contribution only, with 42 percent of plans applying that form.
Most plans—70 percent—use a single-tier match formula, like $0.50 per dollar of 6 percent of pay.
Another 22 percent use a multi-tier formula, like a dollar match on the first 3 percent of pay, and then $0.50 per dollar on the next 2 percent of pay.
About one in five plans offered a $0.50 per dollar match on the first 6 percent of pay, the most common match structure.
Nearly one in five plans contributes more than 6 percent of pay.
The average match among plans was 4.1 percent, which has held steady over the past five years.
9. A 3% default rate dominates.
The most common default contribution rate is 3 percent, with 44 percent of plans using that rate.
Over the past five years, more plans are defaulting at higher rates:
15 percent of plans defaulted at 4 percent in 2016, compared to 12 percent in 2012.
13 percent of plans defaulted 5 percent in 2016, compared to 8 percent in 2012.
20 percent of plans defaulted at 6 percent or more in 2016, compared to just 12 percent in 2012.
10. Default deferrals are increasing.
When plans do incorporate an automatic increase along with automatic enrollment, 65 percent of plans apply a 1 percent annual increase.
Only 9 percent of plans use automatic enrollment without an auto-increase feature.