Defined contribution retirement plans that use automatic enrollment are steadily on the rise and brightening the future of U.S. workers, according to a report by Vanguard.
As of the end of last year, 48 percent of Vanguard plans had adopted automatic enrollment and 66 percent of new plan entrants were enrolled in them, according to the company's 2019 "How America Saves" report.
Auto enrollment among Vanguard's sponsored programs has been rising steadily since 2004, when only 2 percent of plans used them, according to the report.
The report noted that the rate of use of auto enrollment received a boost in 2006 with the passage of the U.S. Pension Protection Act (PPA), which created fiduciary and tax incentives designed to entice sponsors to adopt the programs. Auto enrollment is viewed as a key to successful retirement planning because it allows employers to enroll workers in plans without requiring them to opt in. Workers instead are given the ability to opt out of the plans.
As a result of the use of auto enrollment, Vanguard's data indicates that workers are saving more consistently and with a more balanced approach, as employers have expanded their auto enrollment plans to include automatic annual deferral rate increases.
"Two-thirds of automatic enrollment plans have implemented automatic annual deferral rate increases," the report said. "In 2018, automatic increases narrowed the spread between deferral rates for participants in voluntary enrollment plans as compared with automatic enrollment plans to 0.4 percent points."
Participants in Vanguard-managed voluntary plans had a 7.1 percent deferral rate in 2018, compared with a rate of 6.7 percent for those in automatic plans, according to the report.
Parallel to the growth of auto enrollment has been an increase in participants' use of professionally managed allocations -- mainly target-date funds, but also managed accounts or balanced funds, the report said.
As of the end of last year, 59 percent of Vanguard plan participants were enrolled in such plans -- the large majority of them invested in single target-date funds. That's up from only 7 percent in 2004, the report said. Vanguard predicts that 80 percent of participants will be enrolled in professionally managed funds by 2023.
The expansion of auto enrollment and target-date fund usage isn't an accident, the report noted, as target-date funds are the default investment strategy when a worker is automatically enrolled in many plans.