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2015 Vanguard Report “How America Saves” Findings

As reported by Retirement Plan Advisors, this 15th anniversary edition of Vanguard’s How America Saves study points to some interesting changes many of which reflect the impact of the Pension Protection Act (PPA).

2015 marks the 10th anniversary of the PPA, which enabled the automatic enrollment of workers into 401(k) plans at a default contribution rate and also provided for automatic escalation of contribution rates on a periodic basis. Additionally, PPA provided for the inclusion of target-date funds (TDF). The How America Saves study indicates these provisions have had impact on both workers’ participation and savings.

Aggregate participation rates are higher than ever and continue to rise.

  • 2015 showed 63% of new Vanguard participants were hired with automatic enrollment while only 12% were in 2006.
  • In 2015 75% of eligible workers participated in their employer’s plan, versus 66% in 2005.
  • 41% of Vanguard plans adopted automatic enrollment in 2015 and 70% of those plans included automatic annual increases, while 10 years ago only 10% of their plans included auto-enrollment.
  • TDF use has almost doubled in usage since the PPA passage, and 90% of Vanguard’s plan sponsors now offer these. Overall, 98% of participants now have access to these and 70% actually use them.
  • Jean Young, lead author of the study said, “Target-date funds are, without question, a game changer and one of the most important elements of the 401(k) evolution. As defined contributions plans evolved, it was clear that many workers were not going to serve as their own investment manager. As a result of the rise of target-date funds, we’ve seen dramatic improvements in the portfolio construction of 401(k) participants.”

Improvements to consider

  • Almost 75% of plans default at participant savings rates of 4% or less. So while there is an increase in participation, it’s at a lower rate of contribution.
  • The average deferral rate in 2015 of 6.8% is down from a 7.3% peak in 2007.
  • The rising adoption of auto-enrollments has resulted in an increase of smaller balances, dropping 6% on average account balances ($96,288 in 2015), while the median account balances fell 11% ($26,405 in 2015). 64% of all people surveyed expect Social Security to be their top source of income. But Millennials rank Social Security (44%) behind their own savings through a 401(k) (58%) and personal savings/cash (54%).

The Managing Director of Vanguard’s Institutional Investor Group, Martha King, points out “Plan sponsors – and the industry as a whole – must bear the responsibility to continue the significant progress impelled by the PPA, including driving improved savings rates for all participants.”

Should you have any questions, please feel free to contact your QBI representative.

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