Data & Research June 28, 2016

More Small Businesses Improving DC Plan Design

Increasingly, participants are being directed into default investments selected by the small business plan sponsors Vanguard serves.
Reported by

Vanguard’s third annual “How America Saves: Small business edition,” an extensive report detailing the plan design and participant savings trends of the small business 401(k) plans served by Vanguard Retirement Plan Access (VRPA), reveals that as of December 2015, one-sixth of VRPA plans permitting employee-elective deferrals had adopted automatic enrollment.

Six in 10 of these plans automatically enroll participants at a 3% contribution rate. More than one-third of these plans automatically increase the contribution rate annually. Nearly all of these plans use a target-date or other balanced investment strategy as the default fund, with 96% choosing a target-date fund as the default.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

In 2015, VRPA’s plan-weighted participation rate was 72%. Plans with automatic enrollment have higher participation rates than plans with voluntary enrollment. Plans with an automatic enrollment feature have an overall participation rate of 88%, compared with a participation rate of only 58% for plans with voluntary enrollment.

Plans with automatic enrollment have higher participation rates across all demographic variables. For individuals earning less than $30,000 in plans with automatic enrollment, the participation rate is more than double that of plans with voluntary enrollment.

However, the predominant use of a 3% default deferral rate means participants enrolled in plans through automatic enrollment are saving less. Participants joining a plan under an automatic enrollment feature have an average deferral rate of 5.5%, compared with 7.2% for participants joining plans under voluntary enrollment—a deferral rate that is about one-quarter lower overall. Even participants earning less than $30,000 save more than twice as much on average under voluntary enrollment designs.

Vanguard suggests that higher default deferral 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 report says.

NEXT: Improved participant investment diversification

Increasingly, participants are being directed into default investments selected by the plan sponsor, rather than making active investment choices on their own, Vanguard’s analysis finds. Nearly all VRPA plans have designated a default fund, and 95% had selected a target-date fund option as the default option in 2015.

Ninety-eight percent of plans had specifically designated a qualified default investment alternative (QDIA) under Department of Labor (DOL) regulations. Among all VRPA plans, 96% of designated QDIAs were target-date funds, 3% were balanced funds, and 1% selected a model portfolio.

In 2015, six in 10 VRPA participants were invested in a professionally managed allocation. A total of 57% of participants were invested in a single target-date fund in 2015. Among new plan entrants (those entering the plan for the first time), three-quarters of participants were invested in a single target-date fund.

Most VRPA plan sponsors chose to reenroll participants in a QDIA at conversion. VRPA was launched in 2011 and the majority of these plans converted between 2012 and 2015. Seven in 10 plans reenrolled participants in a QDIA at conversion, and 96% using this strategy reenrolled in a target-date fund.

From an investment perspective, an asset allocation to equities of 80% or more may appear appropriate in light of the long-term retirement objectives of most defined contribution (D)C plan participants, Vanguard says. The growing use of professionally managed allocations within DC plans, including target-date funds, is reshaping equity allocations by age and reducing extreme allocations. The fraction of participants with no allocation to equities was 3% in 2015; the fraction of participants investing exclusively in equities was 7%.

This rising use of professionally managed allocations is also improving portfolio construction. The fraction of participants holding broadly diversified portfolios was 80% in 2015. Less than 1% of VRPA participants were holding concentrated stock positions.

VRPA is a comprehensive service for retirement plans with up to $20-plus million in assets. As of year-end 2015, VRPA served 4,500 plans and 200,000 participants. For more plan design and participant savings trends among these plans, the report may be downloaded from here.
Data & Research June 28, 2016

Retirement Income Calculators Differ Widely

An analysis of 12 calculators resulted in a 60% spread in resulting monthly income.
Reported by

Corporate Insight analyzed the retirement calculators of 12 financial institutions—six of them retirement plan recordkeepers and six not—and despite inputting the same data points for each, found exceptionally different results.

The monthly income projections ranged from a high of $6,013 to a low of $3,772, a 60% spread, and the differences between the monthly income goals were even wider, ranging from a high of $9,029 to a low of $4,892, an 85% spread.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Corporate Insight found six variables that drive the differences in income—taxes, inflation rate, salary growth, Social Security benefits, investment returns and ages—and four differences that drive the variances in income—income replacement ratio, salary growth, inflation rate and taxes.

“While the inputs and assumptions were disconcerting, the action steps suggested, or lack thereof, were equally alarming,” Corporate Insight says in its report, “The Looming Problems With Retirement Planners.” “Ideally, tools should allow users to adjust inputs directly on the results screen that dynamically adjust their retirement income projections.”

Nine of the tools provide a gap analysis, but these, too, vary significantly. “Principal’s tool states that the user will have a monthly income shortfall of $4,597, by far the largest,” Corporate Insight says. “TIAA’s tool projects the lowest income shortfall of $1,120 a month, a whopping 310% less than Principal’s.”

The biggest driver of the income projections is the investment return assumptions, according to Corporate Insight. Some of the calculators don’t allow users to change the returns pre- and post-retirement, three do not account for salary growth, two do not take Social Security benefits into account and one doesn’t take inflation into account. Life expectancies also differ, and only two of the calculators show results post-tax.

The income replacement goal also varied widely: between 85% and 60%. Ten of the calculators provide retirement terminology definitions. Some of the calculators ask users to estimate their state and federal taxes in retirement, rather than asking them to input their zip code and other details that could impact taxes, such as number of dependents and marital status.

Corporate Insight says it is also faulty for some of the calculators to ask people to determine how much savings they will need by the time they retire, rather than a percentage of final income. Two of the calculators show projected income in future dollars, which could lead users to assume they will have more than enough money saved, when that will not be the case. And only a few of the calculators provide actionable advice, rather than promoting the company’s own products. It is also important for users to be able to print the results, so that they can share them with their financial adviser, Corporate Insight says. 

The report may be downloaded from http://www.corporateinsight.com/blog/the-looming-problems-with-retirement-planners. A free registration is required.

«