Vanguard survey highlights retirement complexity, ‘Great Resignation’ mobility

Vanguard's influential 'How America Saves' report shows 401(k) plan participants are facing increasingly complex financial situations and life events.

What’s the big 401(k) takeaway from Vanguard’s yearly retirement report? Retirement is complicated, and getting increasingly more so.

Vanguard Tuesday released the latest edition of How America Saves, the firm’s extensive report on 401(k) plans and employee retirement readiness. One of the world’s leading investment and retirement services companies, Vanguard reviews the nearly 5 million 401(k) accounts held under its management each year to uncover trends and ideas that might aid America’s employers seeking to improve their employee savings plans.

The big finding this year, according to Vanguard, is that while employers have made considerable progress in enhancing their 401(k) plans, many participants are facing “increasingly complex financial situations and life events” that could potentially jeopardize their best efforts at saving.

“There is no doubt that plan sponsors’ efforts over the last two decades have helped improve the retirement readiness of millions of Americans. However, workers’ needs are evolving and so too should plan design,” said John James, managing director and head of Vanguard Institutional Investor Group.

In 2021, the average account balance for Vanguard participants was $141,542, according to the company. Vanguard said its participants’ average account balances increased by 10% since 2020, driven primarily by the increase in equity markets over the year.

Among the key findings of the report was the growth of automatic savings features. The adoption of automatic enrollment has more than tripled since year-end 2007, the first year after the Pension Protection Act of 2006 took effect. At year-end 2021, 56% of Vanguard plans had adopted automatic enrollment, including 75% of plans with at least 1,000 participants, according to Vanguard’s study. Finally, from an investment perspective, 99% of all plans with automatic enrollment defaulted participants into a balanced investment strategy in 2021, with 98% choosing a target-date fund as the default.

The study also highlights the continuation of the rise of professionally managed portfolio allocations, most notably target-date funds. At year-end 2021, 64% of all Vanguard participants were solely invested in an automatic investment program, compared with 7% at the end of 2004 and 36% at year-end 2012. The survey showed 56% of all participants were invested in a single target-date fund; another 1% held one other balanced fund; and 7% used a managed account program.

In terms of offerings, 95% of plans presented target-date funds as an option at year-end 2021, up from 84% in 2012. The increase in the adoption of target-date funds has led to a decrease in trading within participant accounts. During 2021, 8% of plan participants traded within their accounts, while 92% did not initiate any exchanges. Only 3% of participants holding a single target-date fund traded in 2021.

As for savings metrics, when both the employee and employer contributions are included, the average total participant contribution rate in 2021 was 11.2%. When nonparticipants are included, employees hired under automatic enrollment plans saved an average of 10.9%, considering both employee and employer contributions. Employees hired under a voluntary enrollment design saved an average of 7.3%, due to significantly lower participation.

When it comes to Roth 401(k) adoption, at year-end 2021, the Roth feature had been adopted by 77% of Vanguard plans, and 15% of participants within these plans had elected the option.

Finally, the so-called “Great Resignation” has led to participants, primarily younger ones, changing jobs more frequently, with those job-switchers being more likely to interrupt their retirement savings momentum. The Vanguard study showed that most participants with 401(k) balances of less than $1,000 voluntarily or are automatically cashed out of their retirement savings after leaving an employer, compared to just 7% of participants with balances over $100,000.

“Competition in hiring has forced plan features and accessibility to improve, and as this report points out, there is still more that can be done. The report findings also highlight the mismatch between available features of retirement plans and the actual usage by employees,” said Jesse Clinton, managing director at New York-based wealth manager Snowden Lane Partners.