Vanguard: More than half of 401(k) participants invest solely in target-date funds

Annual report also finds voluntary and default savings rates are converging.

Participants in defined contribution plans are relying more on professionally managed investment options, especially target-date funds, Vanguard Group reported Tuesday.

The portion of participants investing in these options climbed to 58% last year from 53% in 2016, according to Vanguard’s annual report on clients’ investing behavior, How America Saves.

Vanguard predicts that could rise to 77% by 2022 for participants investing in these options, which Vanguard defines as target-date funds, managed accounts and target risk/balanced funds.

Of that 58% figure, Vanguard reported that 51% represented participants holding a single-target date fund for all their plan assets, 4% holding a balanced or target risk fund and 3% using a managed account.

“This is huge,” said Jean Young, senior research analyst at the Vanguard Center for Investor Research, remarking on the steady, rising usage of these options. Participants increasingly are attracted to the diversified investment approach of target-date funds, she added.

The greater use of these professionally managed options has coincided with a reduction in extreme allocations in retirement accounts.

For example, Vanguard reported that just 4% of participants held 61% or more of their account balances in company stock last year, compared to 12% in 2008 among plans that offer company stock. Also, Vanguard reported that 3% of participants had no equity or company stock holdings last year versus 11% in 2008. The percentage of participants holding 90% or more of their assets in equities dropped to 11% last year from 17% in 2008.

Vanguard found that average annual employee-elective deferrals have remained steady — oscillating between 6.8% and 7% of pay — since 2008. The estimate for last year was 6.8%. The median deferral rate has been 6% each year.

Ms. Young said Vanguard data also reflect a converging of annual deferral rates between employees saving voluntarily and those using automatic enrollment. In 2008, for example, there was a wide gap between the former with an average of 7.2% versus the latter with an average of 4.7%. By 2016, the rates were identical at 6.8%. Last year, Vanguard’s estimate was 7% for voluntary enrollment versus 6.7% for auto enrollment, which Ms. Young said wasn’t statistically significant.

“It appears that automatic annual increases as well as higher default deferral rates are beginning to cause deferral rates to converge,” the report said. “This suggests that higher default rates would be amenable to plan participants in automatic-enrollment designs. Our research on automatic enrollment indicates that ‘quit rates’ do not deteriorate when higher default percentages are used to enroll employees.”

The Vanguard report is based on client record-keeping results covering 4.6 million participants in 1,900 plans. Approximately 90% of the plans are 401(k) or 403(b) plans. The rest are profit-sharing or money purchase plans.

Robert Steyer is a reporter at InvestmentNews’ sister publication Pensions&Investments.