The portfolios of nearly 30 percent of participants in 401(k) retirement plans at Vanguard are in automatic professionally managed investment programs, which particularly benefit individuals who lack the skills to invest properly on their own, according to Vanguard’s How America Saves 2011. The report draws on Vanguard’s 2010 recordkeeping data for more than 3 million participants in over 2,500 qualified defined contribution plans.
“The growing number of participants taking advantage of professionally managed investment programs and services in their plan clearly shows that the 401(k) system can offer investors a successful way to invest for retirement,” said Jean Young, co-author of the report. ”These services have the potential to dramatically reshape portfolio outcomes for participants because they address the need of many individuals who don’t have the skills to manage their retirement assets.”
Professional Investment Help Sought
The increasing adoption of automatic professionally managed investment programs is significant because they eliminate portfolio construction mistakes by many participants. The report reveals that:
• By year-end 2010, 29 percent of Vanguard participants were entirely invested in automatic default investment programs that include a single target-date or balanced fund, or a managed account advisory service.
• In 2004, just 7 percent of all Vanguard participants were solely invested in an automatic investment program.
In addition to automatic investment programs, many plans offer advice services used by a growing number of participants, according to the report.
• Three in 10 plans offered online advice, and one in eight offered professionally managed accounts.
• Financial planning services are offered to all Vanguard plan participants with plan sponsor authorization, but a fee may apply to those younger than 55. In all, about 15 percent of participants use advice services if offered, with managed accounts the most popular.
Additional Trends Noted
Among other notable trends in participant and plan sponsor behavior:
• Contribution rates. The average deferral rate in 2010 was 6.8 percent, unchanged from 2009 but down from its peak of 7.3 percent in 2007.
• Low-cost investment options. With the current focus on plan fees, more plan sponsors are interested in offering an “index core,” a comprehensive set of low-cost index options that span the global capital markets. In 2010, 40 percent of Vanguard plans offered a set of options with an index core, making the design available to about half of all Vanguard participants.
• Loans. New loan issuance rose in 2009 and 2010, returning to pre-recession levels of 2005. In 2010, 18 percent of participants had a loan outstanding.
• Hardship withdrawals. The number of hardship withdrawals grew 47 percent during the 2005–2010 time period. The 2.2 percent of participants taking hardship withdrawals in 2010 is still low on an absolute basis.
• Distributions. The majority (70 percent) of participants who left their employer in 2010 and were eligible for a distribution preserved their plan assets for retirement by remaining in the plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 92 percent of all plan assets available for distribution were preserved.
Investment Advice Effective When Used, but Participation Lags, SHRM Online Benefits Discipline, November 2010
SHRM Online Benefits Discipline