June 2011Defined contribution (DC) retirementplans are the centerpiece of theprivate-sector retirement systemin the United...
Vanguard is at the forefront of the DC marketplace with more than $400                                   billion in DC pla...
Contents    	    4	   Executive summary    	    7	   Market overview    	    8	   Highlights at a glance    	    9	   DC r...
Accumulating                         Managing                                 Accessing    12	   Plan design              ...
Executive summary          During 2007–2010, plan participants endured a                twofold from 3 in 10 at year-end 2...
High-level savings metrics                                  About half of all contributing participants in 2010    High-le...
Equity allocations continue to vary dramatically             implemented under the PPA; and ongoing          among partici...
Market overview    The U.S. equity market, as represented by the SP 500                                    reported that t...
Figure 2.	      Highlights at a glance          Plan design		                                                             ...
DC retirement plans    DC plans are the dominant type of retirement plan          holdings among the major asset classes. ...
1  ccumulating plan assets  A
Historically employees have had todecide whether to participate and atwhat rate to save. Increasingly employersare making ...
Plan design                                                 Figure 3.       Eligibility, 2010           Nine in 10 Vanguar...
Vesting                                                                          In 2010, 4 in 10 plans immediately vested...
Employer contributions                                                   These statistics summarize the incidence of emplo...
Figure 7.       Distribution of promised matching contributions, 2010    Vanguard defined contribution plans permitting em...
Figure 9.       Employee contributions for maximum match, 2010           Vanguard defined contribution plans permitting em...
Figure 11.      Other employer contributions, 2010    Vanguard defined contribution plans with other employer contribution...
Figure 13.       Maximum pre-tax contribution limit, 2010           Vanguard defined contribution plans permitting employe...
Figure 15.	 Automatic enrollment design by plan size, 2010    Vanguard defined contribution plans with automatic enrollmen...
Among plans automatically enrolling employees,                                  of these plans use a target-date or other ...
Participation rates                                                                     savings program. This broader meas...
Distribution of participation rates                                    DB plan, or employer profit-sharing or ESOP        ...
Participation rates by employee demographics                            Participation rates were lowest for employees    P...
Figure 21.	 Participation by income and gender, 2010             Men and women appear to participate at about             ...
Figure 23.	 Participation rates by plan design, 2010          Plans with automatic enrollment have higher                 ...
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Vanguard dc

  1. 1. June 2011Defined contribution (DC) retirementplans are the centerpiece of theprivate-sector retirement systemin the United States. More than60 million Americans are coveredby DC plans, with assets now inexcess of $4 trillion.
  2. 2. Vanguard is at the forefront of the DC marketplace with more than $400 billion in DC plan assets. In our full-service DC recordkeeping business alone we serve 1,700 plan sponsors and more than 3 million participants. As an industry leader, Vanguard recognizes that it’s important to have a detailed understanding of DC plans and the role they play in the U.S. retirement system. Accordingly, we are pleased to present How America Saves 2011: A report on Vanguard 2010 defined contribution plan data. In this tenth edition, we update our analysis of DC plans and participant behavior, based on 2010 Vanguard recordkeeping data. The first edition of How America Saves was published in 2000, based on 1999 Vanguard recordkeeping data. Initially the publication was updated R. Gregory Barton biennially. However, our readers requested more frequent updates, so Managing Director in 2004 we began publishing annually. This year we are pleased to further Institutional Investor Group enhance the value of the report by introducing a series of benchmark data supplements for selected industry sectors. A list of the sectors we are covering in the series is on page 89. Average participant account balances have now recovered, and at year-end 2010, reached their highest level since we began tracking this data in 1999 in the first edition of How America Saves. We are pleased to report that overwhelmingly participants “stayed the course” throughout the great recession; their saving and investment behavior changed only marginally. We are confident that this report will continue to serve as a valuable reference tool and that our observations will prove useful as your organization continues to develop its retirement programs. Sincerely, 1
  3. 3. Contents 4 Executive summary 7 Market overview 8 Highlights at a glance 9 DC retirement plans 10 Accumulating plan assets 40 Managing participant accounts 72 Accessing plan assets 88 Figure index 89 Methodology 89 Acknowledgements
  4. 4. Accumulating Managing Accessing 12 Plan design 42 Asset and contribution allocations 74 Plan loans 14 Employer contributions 49 Plan investment options 78 Plan withdrawals 18 Automatic enrollment designs 56 Target-date funds 79 Plan distributions and rollovers 21 Participation rates 62 Other investment features 85 Access methods and the internet 26 Employee deferrals 66 Investment returns 34 Aggregate contribution rates 68 Exchange activity 36 Account balances 3
  5. 5. Executive summary During 2007–2010, plan participants endured a twofold from 3 in 10 at year-end 2005. Forty-two substantial period of stock market volatility associated percent of all participants use target-date funds. with the global financial crisis, including a decline of Forty-eight percent of participants owning target-date stock prices of more than half. As of year-end 2010, funds have 100% of their account in a single target- the U.S. stock market remained 20% below its peak date fund. Twenty percent of all Vanguard participants of October 2007. Despite the exceptional volatility are wholly invested in a single target-date fund, that marked the period, the saving and investment either by voluntary choice or by default. behavior of defined contribution (DC) plan participants changed only marginally. In many ways, DC plan An important factor driving use of target-date funds participants’ lack of response to recent volatility is is their role as an automatic or default investment striking, although it is not surprising, given the inertia strategy. The qualified default investment alternative associated with much retirement savings behavior. (QDIA) regulations established by the Pension During this interval, inertia likely benefited many Protection Act of 2006 (PPA) continue to drive adoption participants. As we move beyond the 2008–2009 of target-date funds. As of year-end 2010, 6 in 10 crisis period, the challenges remain largely the Vanguard DC plans have designated a QDIA, whether same: improving plan contribution rates and for automatic enrollment or other default purposes. portfolio diversification. Of plans choosing a QDIA, 89% have selected a target-date fund and 11% a balanced fund as their Improved account balances default investment. The QDIA regulations have had a major influence on default investment strategies In 2010, median ($26,926) and average ($79,077) for plans offering automatic enrollment. Only 1% account balances reached their highest level since we of Vanguard plans with automatic enrollment still use began tracking this data in 1999 in How America Saves. a money market or stable value fund as their default In 2010, median account balances rose by 16% and investment, down from 25% in 2005. average balances rose by 14% from 2009 levels as a result of improving markets and the impact of ongoing contributions. The majority of participants Professionally managed allocations had account balances at year-end 2010 that were An important development in DC plans is the rising higher than they were in 2007. We examined the prominence of professionally managed allocations. change in account balances for continuous Participants with professionally managed allocations participants—those with a balance at both year-end are those who have their entire account balance 2007 and year-end 2010. Among this group, the invested solely in a single target-date or balanced fund median account balance rose by 31% during this period, or a managed account advisory service. At year-end reflecting the dual effect of improving investment 2010, 29% of all Vanguard participants were solely returns and ongoing contributions. Over this three-year invested in an automatic investment program— period, 8 in 10 participants saw account balances stay compared with just 9% 5 years ago. Twenty percent flat or rise. of all participants were invested in a single target-date fund; another 6% held one traditional balanced fund; Growth in use of target-date funds and 3% used a managed account program. These diversified, professionally managed investment Target-date funds’ importance in DC plans continues portfolios have the potential to dramatically improve to grow. Seventy-nine percent of plan sponsors offered portfolio diversification for these participants. target-date funds at year-end 2010, up more than4 Executive summary
  6. 6. High-level savings metrics About half of all contributing participants in 2010 High-level metrics of participant savings behavior were in plans with automatic enrollment, although declined slightly in 2010. The 2010 plan participation the automatic enrollment feature was typically applied rate was 74%, down 2 points from 2009 and back to only to new plan entrants. Three-quarters of automatic levels last seen in 2004. Increases in plan participation enrollment plans have implemented automatic annual related to the growing use of automatic enrollment deferral rate increases, up from about one-third in were more than offset by declines in participation 2005. Almost all plans with automatic enrollment caused by difficult economic conditions. The average (99%) default participants to a balanced investment deferral rate in 2010 was 6.8% and the median was strategy—with 9 in 10 choosing a target-date fund 6.0%, unchanged from 2009. However, average as the default. deferral rates have declined from their peak in 2007 of 7.3%. We estimate that about half of the decline Roth 401(k) adoption in contribution rates is likely caused by economic At year-end 2010, the Roth feature was adopted by conditions, and half is attributable to increased 4 in 10 Vanguard plans and 9% of participants within adoption of automatic enrollment. While automatic these plans had elected the option. We anticipate enrollment increases participation rates, it also leads steady growth in Roth adoption rates, given the to declining plan contribution rates, because default Congressional action making the provision permanent deferral rates are typically set at 3% or lower. and the tax diversification benefits the feature affords. While aggregate savings statistics have weakened Presence of index core options modestly, there has been a marked increase in participation rates among lower-income, younger, Given the growing focus on plan fees, there is and newly hired employees—again attributable to increased interest among plan sponsors in offering automatic enrollment. Participants earning less than a wider range of low-cost passive or index funds. $30,000 had a participation rate of 50% in 2010, A “passive core” is a comprehensive set of low-cost up 7 percentage points from 2005. Similarly, the index options that span the global capital markets. participation rate for employees younger than 25 In 2010, 40% of Vanguard plans offered a set of rose to 41% in 2010, up from 30% in 2005. options providing an index core. Because large plans have adopted this approach more quickly, about half of all Vanguard participants were offered an index Steady use of automatic savings features core as part of the overall plan investment menu. While the adoption of automatic enrollment has more than quadrupled since year-end 2005, growth Shift in participant investment allocations in calendar-year 2010 was more modest. At year-end 2010, 24% of Vanguard plans had adopted automatic The percentage of plan assets invested in equities enrollment, up 3 percentage points from 2009. It rose to 68% in 2010, up from 66% in 2009. Equity remains to be seen whether the slowdown in plan allocations were five points below the 73% reached sponsor adoption of automatic enrollment is related at year-end 2007, just after the peak of global stock to current economic conditions or if adoption prices. We estimate that over the 2007–2010 period, of the feature has reached a plateau. In 2010, 45% 2 points of the decline came from traders shifting of large plans had an automatic enrollment feature, assets to fixed income holdings on a net basis, while compared with 43% in 2009. 3 points came from declining stock prices. Executive summary 5
  7. 7. Equity allocations continue to vary dramatically implemented under the PPA; and ongoing among participants. One in 5 participants has taken communications about company stock risk, also an extreme position, holding either 100% in equities required under the PPA. (13% of participants) or no equities (9% of participants). Rise in loan activity Participant contributions to equities also declined New loan issuance rose in 2009 and 2010, returning from 74% in 2007 to 70% in 2010. New participants to prerecession levels of 2005. In 2010, 18% of enrolling in 2008 and 2009 tended to adopt more participants had a loan outstanding and the average conservative equity allocations. This was somewhat loan balance was $9,000. Only about 2% of aggregate offset by the rising use of target-date funds by new plan assets were borrowed by participants. participants. New participants enrolling in 2010 invested 54% of contributions to target-date funds. Growth of in-service withdrawals Participant trading muted The number of hardship withdrawals grew 47% over the 2005–2010 period; however, at 2.2% of In 2010, participants’ trading activity was at the lowest participants in 2010, the percentage of participants level observed since we began tracking this data in taking hardship withdrawals is still low on an absolute 1999 in How America Saves. During 2010, only 12% basis. The number of in-service nonhardship of DC plan participants traded in their accounts, while withdrawals also grew over this period by 56%. During 88% did not. This measure of trading by plan 2010, 4% of participants took an in-service withdrawal, participants declined by a quarter compared with 2008, taking about 30% of their account balances. All when 16% of plan participants traded. On a net basis, in-service withdrawals during 2010 amounted to traders shifted 1.1% of assets to fixed income in 2010, 1% of aggregate plan assets. In general, the recent with most traders making small changes to their weak economic conditions appeared to be affecting portfolios. Only 1% of all participants actually a small minority of participants. abandoned equities during the year—that is, shifted from a portfolio with some equity exposure to an all- fixed income portfolio. Overall, trading levels remain Assets largely preserved for retirement low. The majority of participants make no trades in Participants separating from service largely preserved a given year—not even to rebalance their account their assets for retirement. In 2010, 8% of participants to a target asset allocation. left their employer and were eligible for a distribution. The majority of these participants (70%) continued to Fall in company stock exposure preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their A shift away from company stock holdings first savings to an IRA or new employer plan. In terms of observed in 2006 continued into 2010. Among plans assets, 92% of all plan assets available for distribution offering company stock, the number of participants were preserved and only 8% were taken in cash. holding a concentrated position of more than 20% of their account balance fell from 42% in 2005 to 31% in 2010. Possible reasons for this change include: continued fiduciary litigation surrounding company stock exposure; plan sponsor easing of company stock restrictions in response to the diversification rules6 Executive summary
  8. 8. Market overview The U.S. equity market, as represented by the SP 500 reported that the U.S. recession officially ended in Index closing value, rose 25% from 2005 through July 2009, several months after the market trough. October 2007, when stock prices reached an historic The unemployment rate was 4.9% in December 2005, peak (Figure 1). As the mortgage and financial system peaked at 10.1% in October 2009, and was at 9.4% crisis unfolded in the United States, stock prices then in December 2010. fell 57% through March 2009. From the March 2009 lows, the U.S. market subsequently rebounded 86% Stock prices were exceptionally volatile during through year-end 2010, reaching the same level as the economic downturn and the period of financial year-end 2005. As of year-end 2010, the SP 500 system instability. Historically, 1% of stock market Index remained 20% below its October 2007 peak.1 trading days are associated with a change in stock prices of greater than +/– 3%. In 2008, 16.8% of During this period, the National Bureau of Economic trading days were characterized by this level of Research (NBER) reported that a severe recession had volatility; in 2009 it was 8.9% of trading days. In 2010, begun in December 2007 as a result of the mortgage only 3.2% of trading days had a volatility level of greater and financial system crisis, just a few months after than +/– 3%. While stock market volatility moderated the stock market peak. The NBER subsequently somewhat in 2010, it remains higher than in 2005–2006. Figure 1. SP 500 daily close 1700 Recessionary period 500 Dec. Dec. Dec. Dec. Dec. Dec. 2005 2006 2007 2008 2009 2010 Source: SP 500. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 1 These changes reflect only the price index level; the total return of buy-and-hold stock market investors would also have included reinvested dividends. Executive summary 7
  9. 9. Figure 2. Highlights at a glance Plan design 2006 2007 2008 2009 2010 Percentage of plans offering immediate eligibility for employee contributions 44% 51% 53% 52% 52% Percentage of plans requiring one year of service for matching contributions 33% 34% 29% 23% 25% Percentage of plans providing an employer contribution 91% 95% 94% 92% 85% Percentage of plans with automatic enrollment 10% 15% 19% 21% 24% Percentage of plans offering Roth contributions 12% 24% 31% 37% 42% Percentage of plans offering catch-up contributions 90% 91% 92% 95% 96% Percentage of plans offering after-tax contributions 20% 20% 20% 19% 19% Participation rates Plan-weighted participation rate 75% 76% 77% 76% 74% Participant-weighted participation rate 66% 68% 73% 73% 68% Percentage of participants using Roth (where offered) 5% 6% 7% 7% 9% Percentage of participants using catch-up contributions (where offered) 14% 12% 13% 12% 13% Percentage of participants using after-tax (where offered) 9% 9% 9% 8% 7% Contribution rates Average participant deferral rate 7.3% 7.3% 7.0% 6.8% 6.8% Median participant deferral rate 6.0% 6.0% 6.0% 6.0% 6.0% Percentage of participants deferring more than 10% 24% 23% 22% 21% 21% Percentage of participants reaching 402(g) limit ($16,500 in 2010) 10% 10% 10% 9% 9% Average total contribution rate (participant and employer) 10.9% 10.7% 10.6% 9.8% 9.7% Median total contribution rate (participant and employer) 10.0% 10.0% 9.8% 9.0% 8.8% Account balances Average balance (typical of participants at about the 75th percentile) $75,791 $78,411 $56,030 $69,084 $79,077 Median balance $25,953 $25,196 $17,399 $23,140 $26,926 Allocation Average plan asset allocation to equities 73% 73% 61% 66% 68% Average plan contribution allocation to equities 72% 74% 73% 68% 70% Percentage of participants with extreme asset allocations (100% fixed income or equity) 32% 28% 27% 25% 22% Plan investment options Average number of funds offered target-date and target-risk counted as one option 16.9 17.6 17.9 18.3 18.6 Average number of funds used 3.6 3.6 3.4 3.4 3.3 Percentage of plans actively offering company stock 11% 11% 11% 11% 11% Percentage of all participants using company stock 25% 22% 22% 21% 20% Percentage of participants with more than 20% of their account in company stock 14% 12% 11% 11% 10% Percentage of plans offering target-date funds 43% 58% 68% 75% 79% Percentage of all participants using target-date funds 10% 18% 28% 34% 42% Percentage of all participants with professionally managed allocations 12% 17% 22% 25% 29% Percentage of plans offering an index core 31% 33% 36% 38% 40% Percentage of participants trading 14% 15% 16% 13% 12% Loans Percentage of plans offering loans 74% 75% 74% 75% 75% Percentage of participants with an outstanding loan (where loans are offered) 17% 16% 16% 16% 18% Percentage of total recordkeeping assets borrowed 2% 2% 2% 2% 2% Withdrawals Percentage of plans offering withdrawals 79% 80% 80% 81% 81% Percentage of participants using withdrawals (where withdrawals are offered) 3% 3% 3% 3% 4% Percentage of total recordkeeping assets withdrawn 1% 1% 1% 1% 1% Percentage of participant account balance withdrawn 28% 30% 33% 33% 30% Plan distributions and rollovers Percentage of terminated participants preserving assets 71% 71% 69% 69% 70% Percentage of assets preserved that were available for distribution 92% 93% 92% 92% 92% Participant access methods Percentage of participants not contacting Vanguard during the year 46% 44% 43% 47% 47% Percentage of participants registered for internet account access 49% 58% 59% 62% 64% Percentage of participant account transactions processed via the internet 69% 69% 72% 76% 80% Source: Vanguard, 2011.8 Executive summary
  10. 10. DC retirement plans DC plans are the dominant type of retirement plan holdings among the major asset classes. As with sponsored by private-sector employers in the United deferral decisions, many such investment decisions States, covering nearly half of all private-sector are increasingly influenced by employer-established workers. Although there is still a significant minority defaults. These investment decisions—including of individuals eligible for such plans who fail to the types of investment options offered by the plan participate in them, DC plans have nonetheless and the choices participants or employers make enabled millions of American workers to accumulate from among those options—have a direct impact savings for retirement. on account performance over time. Thus, investment choices, in conjunction with the level of plan The performance of DC plans can be measured contributions, ultimately influence participants’ in several ways: level of retirement readiness. Accumulating plan assets. The level of plan Accessing plan assets. Participants may be able contributions is fundamental to retirement savings to take a loan or in-service withdrawal to access adequacy. Plan contributions are affected by employee their savings while working. When changing jobs participation rates, participant deferral rates, and the or retiring, they typically have the option of remaining value of employer contributions. Participant deferral in the plan, rolling over to another plan or IRA, or taking behavior is increasingly influenced by employers’ a cash lump sum. automatic enrollment default designations. Overall retirement plan design varies substantially across Our analysis shows that, despite a quite volatile employers—and variation in the level of employer market and economic environment in recent years, contributions does impact the employee contributions most Vanguard DC plan participants have seen their needed to accumulate sufficient retirement savings. retirement savings grow over three- and five-year periods. Meanwhile, most metrics of participant Managing participant accounts. After deciding to behavior have returned to prerecession levels contribute to a retirement savings plan, participants’ in 2010. most important decision is how to allocate their Executive summary 9
  11. 11. 1 ccumulating plan assets A
  12. 12. Historically employees have had todecide whether to participate and atwhat rate to save. Increasingly employersare making these decisions throughautomatic enrollment.
  13. 13. Plan design Figure 3. Eligibility, 2010 Nine in 10 Vanguard-administered DC plans permit pre-tax elective deferrals by eligible employees. Vanguard defined contribution plans permitting employee-elective deferrals Employee deferral decisions are shaped by the design of the DC plan sponsored by their employer. Elective-employee contributions DC plans with employee-elective deferrals can be 70% grouped into four categories based on the type of 56% employer contributions made to the plan: (1) plans 52% with matching contributions, (2) plans with nonmatching employer contributions, (3) plans with both matching and nonmatching contributions, and finally, (4) plans with no employer contribution at all. 21% Nonmatching contributions are typically structured 16% 15% 11% as a variable or fixed profit-sharing contribution, 8% 8% 9% 4% or less frequently as an employee stock ownership 0 plan (ESOP) contribution. Immediate 1 month 2–3 4–6 1 year months months In employee-contributory DC plans, employer Employer-matching contributions contributions are typically a secondary source of plan funding. Both the type and size of employer 70% contributions vary substantially across plans. Eligibility 43% 42% In 2010, more than half (52%) of Vanguard plans allowed employees to make voluntary contributions 25% 25% immediately after they joined their employer (Figure 3). 23% Larger plans were more likely to offer immediate 14% 11% eligibility than smaller plans were; as a result, 56% of 7% 7% 3% employees qualified for immediate eligibility in 2010. 0 Immediate 1 month 2–3 4–6 1 year months months At the other extreme, 15% of plan sponsors required eligible employees to have one year of service before Other employer contributions they could make employee-elective contributions to their plan. Smaller plans were more likely to impose 70% the one-year wait; as a result, only 11% of total 56% eligible employees were subject to this restriction. 45% Eligibility rules are more restrictive for employer 32% contributions, including matching contributions and other types of employer contributions, such as profit- 20% sharing or ESOP contributions. A one-year eligibility 11% 11% rule is much more common for employer contributions, 9% 9% 3% 4% presumably because employers want to minimize 0 compensation costs for short-tenured employees. Immediate 1 month 2–3 4–6 1 year months months Percentage of plans Percentage of employees Source: Vanguard, 2011.12 Accumulating plan assets
  14. 14. Vesting In 2010, 4 in 10 plans immediately vested participants In 2010, almost half of plans (46%) immediately for other employer contributions, such as profit- vested participants in employer-matching sharing or ESOP contributions. Large plans are contributions (Figure 4). Large plans are slightly more likely to immediately vest participants for other more likely to offer immediate vesting and just employer contributions and 45% of participants with more than half (51%) of participants are in plans other employer contributions receive immediate with immediate vesting of employer-matching vesting. On the other hand, 4 in 10 plans with other contributions. Smaller plans are more likely to use employer contributions use a 5- or 6-year graded longer vesting schedules. About one-third of plans vesting schedule and one-quarter of participants with employer-matching contributions use a 5- or receiving other employer contributions are in plans 6-year graded vesting schedule. One in 5 participants with longer vesting schedules. with employer-matching contributions is in a plan with a longer vesting schedule. Figure 4. Vesting, 2010 Vanguard defined contribution plans with employer contributions Employer-matching contributions 70% 51% 46% 17% 15% 14% 11% 10% 9% 4% 4% 3% 3% 2% 4% 2% 1% 2% 2% 0 Immediate 1-year cliff 2-year cliff 3-year cliff 2-year 3-year 4-year 5-year 6-year graded graded graded graded graded Other employer contributions 70% 45% 39% 24% 22% 18% 14% 15% 8% 4% 1% 0% 2% 1% 0% 2% 1% 2% 2% 0 Immediate 1-year cliff 2-year cliff 3-year cliff 2-year 3-year 4-year 5-year 6-year graded graded graded graded graded Percentage of plans Percentage of participants Source: Vanguard, 2011. Accumulating plan assets 13
  15. 15. Employer contributions These statistics summarize the incidence of employer contributions to a DC plan that accepts employee Four in 10 Vanguard plans provided only a matching deferrals. They do not necessarily reflect the entire contribution in 2010, and this type of design covered retirement benefits program funded by certain 56% of participants (Figure 5). One-third of plans, employers. Some employers may offer a companion covering 37% of participants, provided both a employer-funded plan—such as a defined benefit (DB) matching and a nonmatching employer contribution. plan, or a stand-alone profit-sharing, ESOP, or money Eight percent of plans provided only a nonmatching purchase DC plan—in addition to an employee- employer contribution, and 2% of participants were contributory DC plan. in this type of design. Finally, 15% of plans made no employer contributions of any kind in 2010, Matching contributions and 5% of participants were in this category. The wide variation in employer contributions is most evident in the design of employer-matching formulas. As noted previously, eligibility for employer In 2010, Vanguard administered more than 200 contributions is typically more restrictive than distinct match formulas for plans offering an employer eligibility for employee-elective deferrals. In 2010, match. Among plans offering a matching contribution a higher proportion of plans imposed a one-year in 2010, three-quarters (covering 60% of participants) waiting period on employer contributions, whether in provided a single-tier match formula, such as $0.50 the form of a matching or other type of contribution, on the dollar on the first 6% of pay (Figure 6). Less than imposed a one-year waiting period on employee- common, used by 15% of plans (covering one-third elective deferrals. of participants), were multitier match formulas, such as $1 per dollar on the first 3% of pay and $0.50 per dollar on the next 2% of pay. Figure 5. Types of employer contributions, 2010 Another 7% of plans (covering 4% of participants) Vanguard defined contribution plans permitting had a single- or multitier formula, but imposed employee-elective deferrals a maximum dollar cap on the employer contribution, Type of employer Percentage Percentage such as $2,000. Finally, a very small percentage contribution of plans of participants of plans used a match formula that varied by age, Matching contribution only 42% 56% tenure, or other variables. Nonmatching contribution only 8 2 Both matching and other The matching formula most commonly cited as nonmatching contribution 35 37 a typical employer match is $0.50 on the dollar on Subtotal 85% 95% the first 6% of pay. This is the match most commonly No employer contribution 15% 5% offered among Vanguard DC plans and most commonly received by Vanguard DC plan participants. Source: Vanguard, 2011. Figure 6. Types of matching contributions, 2010 Vanguard defined contribution plans with matching contributions Percentage Percentage Match type Example of plans of participants Single-tier formula $0.50 per dollar on 6% of pay 77% 60% Multitier formula $1.00 per dollar on first 3% of pay; $0.50 per dollar on next 2% of pay 15 35 Dollar cap Single- or multitier formula with $2,000 maximum 7 4 Other Variable formulas based on age, tenure, or similar variables 1 1 Source: Vanguard, 2011.14 Accumulating plan assets
  16. 16. Figure 7. Distribution of promised matching contributions, 2010 Vanguard defined contribution plans permitting employee-elective deferrals with a single- or multitier match formula 45% 42% Average (median) value of promised match: 3.9% (3.0%) 37% 24% 19% 14% 12% 10% 7% 8% 9% 5% 6% 4% 1% 0% 2% 0 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%+ to 0.99% to 1.99% to 2.99% to 3.99% to 4.99% to 5.99% to 6.99% Maximum value of match (percentage of pay) Percentage of plans Percentage of participants Source: Vanguard, 2011. In fact, among plans offering a match, 26% provided Figure 8. Promised matching contributions exactly this match formula in 2010, covering 16% of participants. Vanguard defined contribution plans permitting employee-elective deferrals with a single- or multitier match formula Given the multiplicity of match formulas, one way to summarize matching contributions is to calculate 10% the maximum value of the match promised by the employer. For example, a match of $0.50 on the dollar on the first 6% of pay promises the same matching contribution—3% of pay—as a formula of $1 per dollar on the first 3% of pay. 4.1% 4.2% 4.2% 4.0% 3.9% 3.9% 3.5% 3.5% The promised value of the match varies substantially 3.0% 3.0% 3.0% 3.0% from plan to plan. Among plans with single- or multitier match formulas, two-thirds (covering two- thirds of participants) promised a match of between 3% and 6% of pay (Figure 7). Most promised matches 0 2005 2006 2007 2008 2009 2010 ranged from 1% to 6% of pay. The average value of the promised match was 3.9% of pay; the median Average Median value, 3.0%. Average and median promised matches Source: Vanguard, 2011. have remained fairly stable between 2005 and 2010 (Figure 8). Accumulating plan assets 15
  17. 17. Figure 9. Employee contributions for maximum match, 2010 Vanguard defined contribution plans permitting employee-elective deferrals with a single- or multitier match formula 70% 61% Average (median) value of employee contribution to maximize employer match: 7.3% (6.0%) 51% 18% 13% 11% 9% 8% 6% 7% 2% 3% 3% 3% 2% 1% 0% 1% 0% 0% 1% 0 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%+ to 1.99% to 2.99% to 3.99% to 4.99% to 5.99% to 6.99% to 7.99% to 8.99% to 9.99% Employee contribution for maximum match (percentage of pay) Percentage of plans Percentage of participants Source: Vanguard, 2011. Another way to assess matching formulas is to Figure 10. Employee contributions for maximum match calculate the employee-elective deferral needed to realize the maximum value of the match. In 2010, Vanguard defined contribution plans permitting employee-elective 8 in 10 plans (covering 8 in 10 participants) required deferrals with a single- or multitier match formula participants to defer between 4% and 7% of their 10% pay to receive the maximum employer-matching contribution (Figure 9). The average employee-elective 8.0% deferral required to maximize the match was 7.3% 7.8% 7.8% 7.3% 7.1% 7.3% of pay; the median value, 6.0%. The average employee-elective deferral required to maximize 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% the match declined slightly between 2005 and 2010; however, the median deferral required remained constant at 6.0% (Figure 10). Other employer contributions As noted previously, in a minority of plan designs, 0 employers may make another contribution to the 2005 2006 2007 2008 2009 2010 accounts of eligible employees in the form of a Average Median variable or fixed profit-sharing contribution or an ESOP contribution. These contributions, unlike Source: Vanguard, 2011. matching contributions, may be made on behalf16 Accumulating plan assets
  18. 18. Figure 11. Other employer contributions, 2010 Vanguard defined contribution plans with other employer contributions 30% Average (median) value of other employer contribution: 4.5% (4.0%) 24% 22% 15% 14%14% 14% 13% 11% 11% 10% 9% 8% 6% 6% 5% 4% 4% 3% 3% 2% 1% 1% 0 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%+ to 0.99% to 1.99% to 2.99% to 3.99% to 4.99% to 5.99% to 6.99% to 7.99% to 8.99% to 9.99% Value of other employer contribution (percentage of pay) Percentage of plans Percentage of participants Source: Vanguard, 2011. of eligible employees whether or not they actually Figure 12. Other employer contributions contribute any part of their pay to the plan. As with matching contributions, eligibility is more restrictive Vanguard defined contribution plans for these types of employer contributions—many with other employer contributions employees are not entitled to receive these 10% contributions until they complete one year of service. The value of other employer contributions also varies significantly from plan to plan. Among plans offering such contributions in 2010, half provided all participants 4.7% 4.5% 4.5% with a contribution based on the same percentage of 4.0% 3.9% 3.7% 3.9% 4.0% 3.4% pay, while the other half varied the contribution by age 3.0% 3.0% 3.0% and/or tenure. These nonmatching contributions varied in value from about 1% of pay to more than 10% of pay (Figure 11). Among plans with a nonmatching employer contribution, the average contribution was 0 2005 2006 2007 2008 2009 2010 equivalent to 4.5% of pay; the median contribution, 4.0% of pay. Average Median Source: Vanguard, 2011. Between 2007 and 2009, the average value of other employer contributions was about 20% lower than in 2005 and 2006. In 2010, the average value of other employer contributions rebounded to prerecession levels (Figure 12). Accumulating plan assets 17
  19. 19. Figure 13. Maximum pre-tax contribution limit, 2010 Vanguard defined contribution plans permitting employee-elective deferrals 70% 49% 34% 32% 23% 12% 10% 10% 8% 4% 3% 3% 3% 1% 2% 2% 2% 1% 1% 0% 0% 0 10% 10%–19% 20%–29% 30%–39% 40%–49% 50%–59% 60%–69% 70%–79% 80%–89% 90%+ Percentage of plans Percentage of participants Source: Vanguard, 2011. Maximum employee contribution limit Figure 14. Automatic enrollment adoption Many plans have incorporated expanded contribution limits authorized in the Economic Growth and Tax Vanguard defined contribution plans Relief Reconciliation Act of 2001 (EGTRRA). Eighty-two permitting employee-elective deferrals percent of DC plans (covering 89% of participants) have raised to 50% or more the maximum percentage 30% of pay that employees can contribute to their plans 24% (Figure 13). 21% 19% Automatic enrollment designs 15% In a typical 401(k) or 403(b) plan, employees must make an active choice to join the plan. The enrollment decision 10% is framed as a positive election: “Decide if you’d like to join.” Why do employees fail to take advantage of 5% their employers’ plans? Research in the field of behavioral finance provides a number of explanations: 0 2005 2006 2007 2008 2009 2010 • ack of planning skills. Some employees are not L Source: Vanguard, 2011. active, motivated decision-makers when it comes to retirement and financial planning. They lack the skill to plan effectively for the future and find it difficult to defer gratification and pursue long- term goals.18 Accumulating plan assets
  20. 20. Figure 15. Automatic enrollment design by plan size, 2010 Vanguard defined contribution plans with automatic enrollment Number of participants All 1,000 1,000–4,999 5,000+ Percentage of plans with employee-elective contributions offering 24% 16% 48% 45% Percentage of participants in plans offering 47 27 51 49 For plans offering automatic enrollment Percentage of plans with automatic enrollment, automatic savings rate increases, and a balanced default fund 75% 78 74% 67% Percentage of plans with automatic enrollment and a balanced default fund 24 20 26 33 Percentage of plans with automatic enrollment, automatic savings rate increases, and a money market or stable value default fund 1 1 0 0 Percentage of plans with automatic enrollment and a money market or stable value default fund 0 1 0 0 Source: Vanguard, 2011. • efault decisions. Faced with a complex choice D a balanced fund. Under an autopilot plan, the decision and unsure what to do, many individuals often to save is framed negatively: “Quit if you like.” In take the default or “no decision” choice. In the such a design, “doing nothing” leads to participation case of a voluntary savings plan, which requires in the plan and investment of assets in a long-term that a participant take action in order to sign up, retirement portfolio. the “no decision” choice is a decision not to save. • nertia and procrastination. Many individuals deal I As of December 2010, one-quarter of Vanguard plans with a difficult choice by deferring it to another permitting employee-elective deferrals had adopted day. Eligible nonparticipants, unsure of what to components of an autopilot design (Figure 14). Large do, decide to postpone their decision. While many plans are more likely to implement automatic employees know they are not saving enough and enrollment, with more than 45% of midsized and express an interest in saving more, they simply large plans using the feature. As a result, almost half never get around to joining the plan or, if they join, of all participants are now in plans with autopilot to increasing their contribution rates. designs, although automatic enrollment itself typically only applies to newly eligible participants (Figure 15). Automatic enrollment or autopilot designs reframe Adoption of automatic enrollment designs grew only the savings decision. With an autopilot design, modestly in 2010, and by the end of 2010 almost individuals are automatically enrolled into the plan, their half of large plans had added the feature. It remains deferral rates are automatically increased each year, to be seen when the economy improves whether or and their contributions are automatically invested in not adoption of automatic enrollment will grow rapidly again. Accumulating plan assets 19
  21. 21. Among plans automatically enrolling employees, of these plans use a target-date or other balanced 75% use all three features of an autopilot design. fund as the default fund, with 9 in 10 choosing a These plan sponsors automatically enroll employees, target-date fund as the default. automatically increase the deferral rate annually, and invest participants’ assets in a balanced fund. Another We previously analyzed the adequacy of total 24% of plan sponsors automatically enroll employees contribution rates in automatic enrollment plans.2 and invest participants’ assets in a balanced fund, In our sample, 4 in 10 plan sponsors had implemented but do not automatically increase participant designs with inadequate total contribution rates. deferral rates. These plans had designs in which, after five years, total plan contributions—including employee-elective Fifty-eight percent of these plans automatically enroll deferrals and all employer contributions—were less participants at a 3% contribution rate (Figure 16). than 9%. A related concern is that most of these Three-quarters of the plans automatically increase plans apply automatic enrollment only to new hires the contribution rate annually. Ninety-nine percent and leave existing eligible nonparticipants and low savers untouched. Figure 16. Automatic enrollment design trends Vanguard defined contribution plans with automatic enrollment Default automatic enrollment rate 2005 2006 2007 2008 2009 2010 1 percent 4% 3% 3% 2% 2% 2% 2 percent 23 20 17 13 14 13 3 percent 46 52 56 60 57 58 4 percent 12 10 10 10 10 10 5 percent 10 8 7 7 7 6 6 percent or more 5 7 7 8 10 11 Default automatic increase rate 1 percent 31% 57% 66% 75% 74% 74% 2 percent 0 2 2 2 1 1 Voluntary election 44 27 23 16 17 20 Service feature not offered 25 14 9 7 8 5 Default fund Target-date fund 42% 63% 81% 87% 90% 92% Other balanced fund 33 26 15 11 9 7 Subtotal 75% 89% 96% 98% 99% 99% Money market or stable value fund 25% 11% 4% 2% 1% 1% Source: Vanguard, 2011. 2 Utkus, Stephen P. and Jean A. Young, 2007, Measuring the effectiveness of automatic enrollment, Vanguard Center for Retirement Research, institutional.vanguard.com.20 Accumulating plan assets
  22. 22. Participation rates savings program. This broader measure of plan A plan’s participation rate—the percentage of eligible participation has begun a modest rise in recent years. employees who choose to make voluntary This increase likely reflects the adoption of automatic contributions—remains the broadest metric for enrollment by larger plan sponsors, predominantly gauging 401(k) plan performance. The most common for new hires. measure of participation rates is calculated by taking the average of participation rates among a group of These two measures provide different views of plans. We refer to this as the plan-weighted employee participation in their retirement savings participation rate. In 2010, Vanguard’s plan-weighted plans. The first measure indicates that, in the average participation rate was 74% and has remained basically plan, about one-quarter of eligible employees fail to unchanged since 2001 (Figure 17). contribute. The second measure, however, shows that within the entire employee universe, about 3 in 10 A second measure of participation rates considers employees fail to take advantage of their employer’s all employees in Vanguard-administered plans as if plan. The first measure is a useful benchmark for they were in a single plan. We refer to this as the an individual plan sponsor because it is calculated participant-weighted participation rate. Across the at the plan level; the second is a valuable measure universe of Vanguard participants, 68% of eligible of the progress of 401(k) plans as a whole because employees are enrolled in their employer’s voluntary it looks at all eligible employees across all plans. Figure 17. Participation rates Vanguard defined contribution plans permitting employee-elective deferrals 100% 76% 75% 75% 76% 77% 76% 74% 74% 74% 73% 73% 74% 66% 66% 68% 68% 65% 65% 65% 65% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Plan-weighted Participant-weighted Note: The 2010 participation rates are drawn from a subset of plans that had completed nondiscrimination testing by March 2011 and represents approximately half of the clients for whom we perform testing. When testing has been completed for all plans, the analysis is performed again and the data is restated for prior years. Plans that complete testing by March generally have lower participation rates and include plans with concerns related to passing nondiscrimination testing. The previously reported plan- and participant-weighted participation rates for 2009 were 75% and 69%. Source: Vanguard, 2011. Accumulating plan assets 21
  23. 23. Distribution of participation rates DB plan, or employer profit-sharing or ESOP Participation rates vary considerably across plans contributions to a DC plan. Other possible reasons (Figure 18). In 2010, half of plans had a participation include the inherent difficulty of communicating across rate of 80% or higher, while 1 in 10 had a many locations in a large firm and the fact that large participation rate of less than 50%. firms often outsource the enrollment process to their provider, while small firms may tend to rely on an Participation rates also vary by plan size, with larger in-house human resources representative. Larger plans plans having lower participation rates than other plans have been most likely to add automatic enrollment; (Figure 19). One reason for lower participation rates at however, it has typically been added only for new large companies may be the presence of another employees, leaving existing nonparticipants unaffected. retirement plan benefit, such as an employer-funded Figure 18. Distribution of participation rates Vanguard defined contribution plans permitting employee-elective deferrals Percentage of plans Plan participation rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 90%–100% 20% 15% 15% 15% 16% 17% 20% 24% 23% 18% 80%–89% 27 29 27 28 26 28 31 30 29 32 70%–79% 24 26 25 24 25 23 20 20 20 18 60%–69% 13 15 15 15 15 16 14 11 11 12 50%–59% 8 7 9 9 9 8 8 8 7 8 50% 8 8 9 9 9 8 7 7 10 12 Average plan participation rate 76 75 74 74 74 75 76 77 76 74 Source: Vanguard, 2011. Figure 19. Participation rates by plan size Vanguard defined contribution plans permitting employee-elective deferrals Number of participants Plan-weighted participation rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1,000 77% 76% 75% 75% 75% 75% 76% 77% 75% 74% 1,000–4,999 72 71 70 71 71 73 75 78 79 76 5,000+ 71 71 72 70 69 71 73 78 76 69 All plans unweighted 76 75 74 74 74 75 76 77 76 74 Participant-weighted participation rate 1,000 70% 70% 69% 69% 68% 68% 72% 74% 71% 70% 1,000–4,999 65 66 64 66 64 66 67 71 72 66 5,000+ 62 64 64 63 64 65 67 74 73 68 All plans weighted 65 66 65 65 65 66 68 73 73 68 Source: Vanguard, 2011.22 Accumulating plan assets
  24. 24. Participation rates by employee demographics Participation rates were lowest for employees Participation rates also vary considerably by employee younger than 25. Only 41% of employees younger demographics (Figure 20). Income is one of the primary than 25 made voluntary deferrals to their employer’s determinants of plan participation rates. Only half of plan in 2010, while about 7 in 10 eligible employees eligible employees with incomes of less than $30,000 between ages 35 and 64 saved for retirement in their contributed to their employer’s DC plan in 2010, while employer’s plan. Tenure had a significant influence 88% of employees with incomes of more than on plan participation. In 2010, only 49% of eligible $100,000 elected to participate. Yet even among the employees with less than two years on the job highest-paid employees, 12% of eligible workers still participated in their employer’s plan, while 78% failed to take advantage of their employer’s DC plan. of employees with ten years or more of tenure participated. Figure 20. Participation rates by participant demographics Vanguard defined contribution plans permitting employee-elective deferrals 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 All 65% 66% 65% 65% 65% 66% 68% 73% 73% 68% Income $30,000 42% 44% 41% 41% 43% 43% 45% 56% 55% 50% $30,000–$49,999 67 66 66 63 64 63 66 71 70 65 $50,000–$74,999 80 79 77 75 75 74 76 78 76 71 $75,000–$99,999 87 87 85 83 83 84 84 85 84 80 $100,000+ 90 91 90 90 90 91 91 91 90 88 Age 25 31% 30% 27% 28% 30% 33% 38% 49% 49% 41% 25–34 60 60 58 58 57 58 61 68 68 61 35–44 73 72 70 69 68 69 70 75 74 69 45–54 75 75 73 72 71 71 74 78 77 73 55–64 75 74 74 71 71 72 74 77 76 73 65+ 60 58 62 58 58 57 62 67 68 67 Gender Male 66% 67% 65% 64% 65% 66% 69% 75% 73% 67% Female 64 64 64 62 64 64 67 73 72 68 Job tenure (years) 0–1 46% 39% 37% 41% 42% 45% 49% 58% 55% 49% 2–3 65 65 59 56 56 58 61 69 69 58 4–6 75 74 70 68 66 67 68 73 72 67 7–9 78 78 77 75 73 73 74 79 77 72 10+ 79 78 79 77 77 79 80 82 81 78 Source: Vanguard, 2011. Accumulating plan assets 23
  25. 25. Figure 21. Participation by income and gender, 2010 Men and women appear to participate at about the same level. But these overall averages fail to Vanguard defined contribution plans permitting account for the income differences between men employee-elective deferrals and women. At most income levels, women are significantly more likely than men to join their Female Male All employer’s plan (Figure 21). For example, in 2010, $30,000 49% 51% 50% 78% of women earning $50,000 to $74,999 $30,000– $49,999 69 61 65 participated in their employer’s plan—compared $50,000– $74,999 78 68 71 with 68% of men in the same income group. $75,000– $99,999 84 78 72 $100,000+ 86 88 88 Participation rates also vary by industry group (Figure 22). Source: Vanguard, 2011. Employees in the agriculture, mining, and construction industry group had the highest participation rate, with 9 in 10 workers participating in their employer’s plan, Figure 22. Participation rates by industry sector, 2010 while employees in the wholesale and retail trade industry had the lowest participation rate, at 46%. Vanguard defined contribution plans permitting employee-elective deferrals Impact of automatic enrollment on plan participation Plan- Participant- Reflecting increased adoption of automatic enrollment weighted weighted designs, there was dramatic improvement in Overall 74% 68% participation rates between 2005 and 2010 among demographic groups that traditionally have lower Industry group voluntary participation rates. Employees in plans with Agriculture, mining, and construction 77% 89% an automatic enrollment feature at the end of 2010 Finance, insurance, and real estate 81 79 have an overall participation rate of 82% compared Manufacturing 73 75 with a participation rate of only 57% for employees Transportation, utilities, in plans with voluntary enrollment (Figure 23). This is and communications 74 70 especially remarkable in light of the fact that most Business, professional, and nonprofit 76 63 plan sponsors have implemented automatic Media, entertainment, and leisure 67 63 enrollment prospectively for new hires only. Education and health 78 59 Wholesale and retail trade 68 46 Source: Vanguard, 2011.24 Accumulating plan assets
  26. 26. Figure 23. Participation rates by plan design, 2010 Plans with automatic enrollment have higher participation rates across all demographic variables. Vanguard defined contribution plans permitting For individuals earning less than $30,000, the employee-elective deferrals participation rate is about triple that of plans with voluntary enrollment. Voluntary Automatic enrollment enrollment All All 57% 82% 68% Aggregate plan participation rates As noted previously, some plan sponsors make other Income nonmatching contributions for all eligible employees, $30,000 26% 76% 50% whether or not these employees actually defer any $30,000– $49,999 52 79 65 part of their pay to the plan. When these contributions $50,000– $74,999 60 86 71 are factored in, both the plan- and participant-weighted $75,000– $99,999 73 89 80 participation rates improve. The plan-weighted $100,000+ 85 93 88 participation rate rises to 80% and the participant- weighted rate to 71% (Figure 24). In other words, Age across all Vanguard plans, nearly three-quarters 25 18% 72% 41% of employees either make their own contributions, 25–34 47 81 61 receive an employer contribution, or both. 35–44 58 82 69 45–54 64 84 73 Figure 24. Aggregate participation rates 55–64 66 84 73 65+ 60 80 67 Vanguard defined contribution plans permitting employee-elective deferrals Gender Male 54% 83% 67% 100% Female 58 82 68 83% 84% 81% 82% 83% 78% 79% 80% 72% 74% Job tenure (years) 70% 71% 0–1 29% 75% 49% 2–3 44 81 58 4–6 57 82 67 7–9 66 82 72 10+ 71 85 78 Source: Vanguard, 2011. 0 2005 2006 2007 2008 2009 2010 Plan-weighted Participant-weighted Source: Vanguard, 2011. Accumulating plan assets 25

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