More defined contribution sponsors and participants are now getting it, according to a new study.
Defined contribution (DC) retirement plans, the primary way many Americans save for retirement, are becoming a more effective retirement savings vehicle, according to the 16th edition of the Vanguard Group’s study, “How America Saves 2017.”
DC savings rates have gone up as a result of greater use of automatic enrollment features, according to the study. That is leading to higher participation rates in DC plans, with plan participants increasingly opting for professional management by using target-date funds, with less frequently investing in company stock or borrowing against balances, the study says.
“Nearly half of plans use automatic enrollment, representing an astounding 300 percent growth of this feature over the past 10 years,” the report says. “Plan sponsors recognize that defaulting employees into retirement savings plans provides a seamless, effortless way to start saving.”
The report said plans with automatic enrollment feature have a 90 percent participation rate, while plans with voluntary participation remained at 63 percent rate, the same as a decade ago.
Vanguard, one of the mutual fund industry heavyweights in offering DC plans, has about $1 trillion in DC assets under management as of March 31. A bit over half of those assets are in some kind of managed account. These include target-date and single target risk funds, a traditional balanced fund or a managed account advisory service, the report said.
The overwhelming majority of these participants use the target-date option, while only 17 percent of participants used these professional management options at the end of 2007.
“They signal a shift in responsibility for investment decision making away from the participant and back to the employer-selected investment and advice programs,” according to the report.
Jean Young, senior research analyst at the Vanguard Center for Investor Research and the lead author of the report, said that automatic retirement investing through professional management is becoming popular becomes “it simplifies things.”
She noted that even the highly educated like using them so they can avoid going through the issues of modern portfolio theory. This trend of a simple check off in selecting one’s retirement plan allocation is expected to continue, Vanguard officials said.