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How America Saves: The Unending Quest to Improve Retirement Savings Habits

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Convincing Americans to save and invest appropriately for retirement, it seems, is a bit like convincing them to get plenty of sleep, eat healthy and exercise—it can be done, but it’s a never-ending quest that never seems to work for everybody.

Since 2000, The Vanguard Group has been studying the behavior of retirement plan participants in what are now more than 1,900 retirement savings plans on its recordkeeping platform. Ten years ago, says Patricia Selim, head of stable value investments at Vanguard, the median deferral rate for participants in those plans or the median amount of their pay they were socking into their plans was 6 percent. As of 2017, that median deferral rate was … unchanged.

Speaking at the 2018 SVIA Fall Forum in Washington, Selim suggested that figure was so sticky in part because many participants tend to set their deferral rates just high enough to take advantage of their employer’s matching contributions. The most common formulas have employers matching 50 percent of what employees contribute, up to 6 percent of their salary, or 100 percent of what they contribute, up to the 3 percent of their salary.

Vanguard’s data also shows that about a quarter of eligible workers fail to participate in their plans. Selim noted that plan sponsors who incorporate an automatic enrollment feature into their plans can typically push participation rates upward of 90 percent. As of 2017, she said, 46 percent of the plans in Vanguard’s recordkeeping system had adopted automatic enrollment, although many were using it only for new employees and were not going back and reenrolling existing employees who never joined the plan.

Perhaps more worrisome is what’s happening with lower income employees—those earning less than $30,000 annually. Among that group, Selim said, deferral rates tend to be lower in plans with automatic enrollment (4.2 percent) than without (5.0 percent). She suggested that may be because employers often set the default deferral rate low for fear that participants otherwise might opt out of their plans.

Account balances in defined contribution retirement plans have risen modestly over the past decade, Selim said, from a median of $17,000 in 2008 to $26,000 in 2017—and from an average of $56,000 to an average of $104,000. Selim cautioned that those averages are not characteristic of the typical participant. “Those numbers are for the 75th percentile, meaning only 25 percent of participants have balances higher than that, and 75 percent have balances that are the same and lower.”

Overall allocations to equities haven’t changed much in Vanguard’s participant accounts over the past several years, Selim added, standing at 73 percent at year-end 2017. However, she noted, an increasing share of those equities are now held in target-date funds.

In fact, allocations to professionally managed funds of any kind, including target-date funds, traditional balanced funds and managed account programs, have increased substantially, to 58 percent in 2017 from 22 percent in 2008. Digging into the details shows that allocations to target-date funds during that time rose to 51 percent from 13 percent, while allocations to managed accounts rose to 3 percent from 2 percent.

Perhaps surprisingly, for all the efforts the retirement industry has poured into it, investment advice, while now more frequently offered, is still seldom used. While 65 percent of plans now offer online advice and 71 percent offer financial planning advice for those over the age of 55, only 6 percent of participants use the former and only 2 percent use the latter.

Nonetheless—and perhaps reflecting the increased use of target-date funds and managed accounts—portfolio construction has improved, with 74 percent of participants now using asset allocation strategies versus just 41 percent in 2008.

Among the biggest challenge for the retirement industry moving forward, Selim said, will be helping participants who aren’t saving enough save more, helping participants figure out how to draw down their retirement plan assets once they stop working, and making retirement plans available to a broader cross-section of the public. Right now, she noted, three in 10 private sector workers work for employers who do not offer any type of retirement plan.