1. More participants are completely invested in managed products.
By the end of 2017, nearly six in 10 of all Vanguard participants were solely invested in an automatic investment program—a TDF, target-risk fund, or managed account. (Photo: Shutterstock)
2. TDFs the favored QDIA by a wide margin.
Of all Vanguard participants, 51 percent are invested in a single TDF; 4 percent use a balanced fund; and 3 percent use a managed account program. In 2010, only 29 percent were invested in a single managed product. Vanguard projects that by 2022, 77 percent of its participants will be invested in a single managed product. In 2017, “new entrants,” or those investing in a DC plan for the first time, invested solely in a TDF or other managed option at a nearly 90 percent clip. (Photo: Shutterstock)
3. Far fewer participants going it alone.
Three-quarters of Vanguard participants have a TDF in their portfolio. Of that segment, two-thirds are entirely invested in one TDF. For the entire Vanguard universe, 97 percent of participants are in a plan that offers a TDF. (Photo: Shutterstock)
4. Not all are using TDFs by default.
That fact that TDFs are a qualified default investment alternative for plan sponsors when they auto-enroll employees goes a long way to understanding the products’ assent. But as Vanguard notes, participants choose TDFs on their own in equal numbers to those defaulted into the investments. More than half—52 percent—of participants chose a TDF via voluntary enrollment. Of that group, 32 percent hold a single TDF. (Photo: Shutterstock)
5. Auto-enrollment triples over past decade, but flat over last two years.
By the end of 2017, 46 percent of Vanguard plans had adopted automatic enrollment. Adoption of auto-enrollment has been brisk since 2009, when only 24 percent of plans deployed the feature. But adoption between 2016 and 2017 was flat, begging the question as to why so many sponsors still resist using auto-enrollment. (Photo: Shutterstock)
6. Participation rates spike under auto-enrollment.
Plans with automatic enrollment have a 92 percent participation rate, compared with a participation rate of just 57 percent for plans with voluntary enrollment. (Photo: Shutterstock)
7. Smaller firms less likely to auto-enroll.
Only 30 percent of plans with less than 500 workers use automatic enrollment, compared to 68 percent of plans with 1,000 to 5,000 participants. In 2017, two-thirds of new plan entrants were in plans that use auto-enrollment. (Photo: Shutterstock)
8. More plans using auto-escalation, full autopilot.
When plans do use auto-enrollment, they tend to add on auto-escalation as a plan feature. Two-third of plans with auto-enrollment also auto-escalate participants’ contribution rates. Only one-third of plans auto-enroll participants and don’t automatically increase contribution rates. Nearly all—97 percent—of plans that auto-enroll use a TDF as the default investment. (Photo: Shutterstock)
9. Default rates on the rise.
Vanguard says plan design is improving by virtue of higher default contribution rates. In 2017, half of plans auto-enrolled at 4 percent of salary or higher, compared to 2008 when only one-quarter did. And 21 percent of plans defaulted at 6 percent or higher, more than double than did so in 2008. Since 2008, 3 percent has been the most common default rate, but that standard is on the decline. In 2008, 60 percent defaulted at 3 percent. By the end of last year, only 41 percent defaulted at 3 percent. (Photo: Shutterstock)
10. More TDFs, less trading in accounts.
TDFs are designed to discourage participants from overcooking their savings plan. Vanguard’s study shows that as TDF adoption has increased, participants are trading less in their DC accounts. In 2017, 8 percent of all DC participants traded in their accounts. But for those invested in a single TDF, only 2 percent made trades in 2017. “Over the past decade, we have observed a decline in participant trading,” write analysts from Vanguard. “The decline in participant trading is partially attributable to participants’ increased adoption of target-date funds.” (Photo: Shutterstock)
Just how impactful have investment product and plan design innovations been on the savings habits of participants in employer-sponsored retirement plans?
This year’s How America Saves study from Vanguard—which could just as well be titled How America Has Improved the Way It Saves—sets out to put a fine point on the role managed products and automatic enrollment have had on the 4.9 million participants in the fund manager’s recordkeeping business.
When Congress passed the Pension Protection Act of 2006, it set a direct course for automatic enrollment, target-date funds, and other professionally managed options for savers.
More than a decade out, the virtues of the legislation—or at least its provisions relative to the defined contribution market—are hard to refute.
By no means are those virtues without controversy. Over the bull market, some have criticized TDFs for assuming too much equity risk for near-retirement vintages. Implicit in the criticism is that fund managers have added equity exposure to juice returns and make their products more attractive. Others have claimed it is a straight revenue grab: Underlying equity funds in TDFs yield higher fees for managers than fixed-income funds.
Whatever the merits of those criticisms may be, the impact of managed products—and auto-enrollment—on improving not just participation rates but asset allocation habits is irrefutable.
Vanguard found that when participants construct their own portfolios, 10 percent hold “extreme” allocations—defined as either 0 percent or 100 percent in equities. Since the advent of TDFs, by comparison, three-quarters of Vanguard participants now have broadly diversified portfolios, up from 50 percent a decade ago.
Vanguard has clearly benefited from the TDF revolution. For the past several years it has stood atop the TDF industry, holding more than $650 billion in assets. In 2017, 54 percent of all cash flow to TDFs went to Vanguard’s series, according to Morningstar.
Here are 10 takeaways from this year’s How America Saves Report.
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