Vanguard Group issued a series of recommendations to defined contribution sponsors on improving participant outcomes beyond increasing enrollment and account balances.
The recommendations, released Friday, are based on Vanguard’s latest annual report, “How America Saves,” tracking results of participants in record-kept plans during 2020, as well as other Vanguard research. The recommendations are contained in the report, “Insights To Action,” a supplement to “How America Saves.”
Some sponsors have employed all or some of the suggestions, but the Vanguard’s Insights report indicates there is room for improvement for sponsors that haven’t chosen — or only partially implemented — these practices.
For example, Vanguard advocates auto-enrollment augmented by automatic annual increases and a 6% default rate, or at least a rate to the company match.
The company noted that its record-kept plans had a 92% participation rate in 2020, if they offered automatic enrollment vs. a 62% rate for plans offering voluntary enrollment in 2015. The employee savings rate was 10.7% for the former vs. 6.8% for the latter.
The Vanguard report said 57% of plans had an initial default rate of 4% or more of salary last year vs. 43% of plans in 2015.
For sponsors concerned about participants opting out of auto-enrollment if the default rate was raised too high, the report said the opt-out rate for a 6% default was the same as for a 3% default. “Increasing the default should not raise concerns that participation could decrease,” the report said.
“Getting retirement plan participants to save more remains a priority, but plan sponsors are increasingly paying attention to ensuring participants have the necessary tools to help them spend wisely in retirement,” the report said.
That’s why Vanguard recommends plans allow for installments and flexible withdrawals for retirees, provide modeling and spending tools and offer “an advice option that includes solutions regarding retirement income.”
Vanguard encourages participants to keep their money in employers’ plans after retirement. “Participants can be well served by staying in their employer’s retirement plan through retirement,” the report said. “Participants benefit from fiduciary oversight. The rigor plan sponsors take with their participants’ best interests in mind provides some assurance that their investment choices match the level of risk investors are willing to take.”
In addition, retirees who keep their money in employer’s plans benefit from institutional pricing instead of retail pricing in Individual Retirement Accounts.
“The price difference can be significant, sometimes 50 basis points or more,” the report said. “The higher fees can reduce participants’ principal and income stream in retirement.”
Acknowledging that participants may face financial emergencies, Vanguard, nevertheless recommended several strategies to sponsors to avoid significant leakage.
Sponsors should limit participants to one loan outstanding at a time; set minimum limits for hardship withdrawals; and restrict withdrawal frequency to twice a year, the report said, Vanguard also recommended establishing a “cooling-off” period of 30 days to 6 months between loan payoffs and taking a new loan.
Vanguard’s latest “How America Saves” report covers 1,700 qualified plans run by 1,400 clients encompassing 4.7 million participants. About 90% of these plans have a 401(k) or 403(b) employee contribution feature; the others are employer-contribution plans, such as profit-sharing or money purchase plans.
