Data & Research June 13, 2019

Nearly Half of Vanguard Plans Use Automatic Enrollment

At year-end 2018, 66% of new plan entrants were enrolled via automatic enrollment.

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The increased use of automatic savings features has helped more employees save at near optimal levels, and save more effectively, according to Vanguard’s “How America Saves 2019.” At year-end 2018, 48% of Vanguard plans had adopted automatic enrollment, and 66% of new entrants were enrolled via automatic enrollment. Forty percent of contributing participants in 2018 joined their plan under automatic enrollment.

Ninety-nine percent of all plans with automatic enrollment paired that with a balanced investment strategy, with 98% choosing a target-date fund as the default.

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Including both employee and employer contributions, the average 15-year total contribution rate in 2018 was 10.6%, while the median was 9.8%. Sixty-six percent of plans that use automatic enrollment pair that with automatic escalation.

At year-end 2018, 52% of all participants were invested in a single target-date fund (TDF), 3% in a balanced fund and 4% in a managed account program. Vanguard expects that by 2023, 80% of Vanguard participants will be enrolled in a professionally managed allocation. By year-end 2018, only 9% of participants have taken an extreme position, holding either 100% equities (6% of participants) or no equities (3%).

Ninety percent of plan sponsors offered a TDF at year-end 2018, up one-third from year-end 2008. Ninety-seven percent of Vanguard participants are in plans that offer TDFs, and 77% of participants use TDFs

At year-end 2018, 71% of Vanguard plans had adopted the Roth feature, and 11% of participants were invested in such plans. In 2018, the average account balance was $92,148 and the median balance was $22,217. As more new plans with small balances converted to Vanguard in 2018, the average account balances declined by 11% in the year and the median account balances were down 16%.

In 2018, 13% of participants had an outstanding loan, down from 17% in 2014. The average balance was $9,900.

“Our research has shown plan sponsors have a continued commitment to improving plan design for participants which has led to positive results: increased participation, savings rates and improved portfolio construction,” says Martha King, managing director of Vanguard’s Institutional Investor Group. “Moreover, the greater adoption of target-date funds signals a shift in responsibility as participants’ investment decisionmaking is increasingly moving toward employer-selected investment and advice programs. We are actively using this research and other participant data to better understand the individual behind every financial decision in order to drive better retirement outcomes.”

Despite volatile U.S. equity markets in 2018, with the market declining by 6%, only 8% of participants made one or more portfolio trades or exchanges during the year. The number of participants holding more than 20% of their account balance in company stock fell to 19%, down from 30% in 2009.

Jean Young, lead author of “How America Saves” and senior research associate with the Vanguard Center for Investor Research, tells PLANADVISER that it is these balanced accounts, the fact that people generally tend to only look up their balances when they receive their quarterly statements, and their ongoing contributions, that keep investors in the markets during periods of volatility. Young also says that within the next month, Vanguard will be releasing a report looking at investors’ behavior during periods of market volatility.

In 2018, 33% of participants could have taken a distribution due to separation of service in the current or prior year, but 81% of these participants kept their assets either in the current plan, in a new plan through a rollover, or by moving the assets into an individual retirement account (IRA). In terms of assets, 96% of all assets available for distribution were preserved and only 4% were taken in cash.

Young says people tend to take distributions when the plan only permits lump sum distributions. Because plan sponsors typically negotiate much lower investment fees than people can obtain on their own, Vanguard is encouraging all of the retirement plan sponsors it serves to adopt ad hoc distribution options, to encourage people to remain invested in the plans after retiring.

“Plan design is undoubtedly the most powerful tool to drive improved savings behavior, but it is all the more promising to see participants taking positive steps on their own to secure their financial future,” Young says. “The trend toward preserving retirement savings upon separation of service is especially encouraging, as it shows participants are thinking long-term.”

Compliance June 13, 2019

Supreme Court to Weigh In on ‘Actual Knowledge’ in ERISA Cases

The Employee Retirement Income Security Act (ERISA) does not actually define "actual knowledge" required by participants who file fiduciary breach cases, and U.S. Circuit Courts are split on the issue.

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The U.S. Supreme Court has granted a petition for writ of certiorari filed by the Intel Corporation Investment Policy Committee asking the court to determine whether the provision of plan documents, in itself, creates for participants “actual knowledge” of an alleged fiduciary breach under the Employee Retirement Income Security Act (ERISA).

The lawsuit says Intel invested participant assets in custom-built target-date funds (TDFs), which included alternative investments, that have underperformed peer funds by approximately 400 basis points annually. The lawsuit claims automatic enrollment and a re-enrollment of existing participants resulted in more than two-thirds of participants being allocated to custom-built investments. The text of the complaint goes into great detail about why the plaintiffs believe hedge funds and private equity funds are inappropriate investments for ERISA retirement plans.

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In April 2017, a federal district court judge found that claims against Intel Corporation’s Investment Policy Committee were time-barred under ERISA’s three-year statute of limitations. U.S. Magistrate Judge Nathanael M. Cousins of the U.S. District Court for the Northern District of California noted that actual knowledge exists when a plaintiff knows of the transaction constituting the alleged violation. He found that the plaintiff had actual knowledge of the facts underlying his substantive claims because financial disclosures sent to plan participants over the years provided information about plan asset allocation and an overview of the logic behind investment strategy.

However, the 9th U.S. Circuit Court of Appeals overturned the decision in December 2018 and remanded it back to the District Court, finding that the lower court used an errant interpretation of “actual knowledge.”

The appellate court’s decision says: “The lesson we draw from these cases is two-fold. First, ‘actual knowledge of the breach’ does not mean that a plaintiff has knowledge that the underlying action violated ERISA. Second, ‘actual knowledge of the breach’ does not merely mean that a plaintiff has knowledge that the underlying action occurred. ‘Actual knowledge’ must therefore mean something between bare knowledge of the underlying transaction, which would trigger the limitations period before a plaintiff was aware he or she had reason to sue, and actual legal knowledge, which only a lawyer would normally possess.”

The court concluded: “In light of the statutory text and our case law, we conclude that the defendant must show that the plaintiff was actually aware of the nature of the alleged breach more than three years before the plaintiff’s action is filed. The exact knowledge required will thus vary depending on the plaintiff’s claim.”

Speaking about the case with PLANADVISER, Marcia Wagner, founder and managing partner of the Wagner Law Group, said there has been a longstanding split of authority among the circuit courts about the issue. “For example, the Court of Appeals for the 3rd Circuit and the 5th Circuit have held that ‘actual knowledge’ requires a plaintiff to know not only the facts concerning the conduct or transaction that constitutes the breach but also that these are actionable under ERISA. Other courts take the position that it suffices if the plaintiff has actual knowledge of the underlying conduct, but that it is not necessary for the plaintiff to have knowledge of the law,” she said.

Wagner added that the 4th Circuit has taken a flexible approach, concluding that the less complex the underlying factual transaction, and the more egregious the alleged breach or violation, the more readily a plaintiff may be found to have actual knowledge.

“It would be useful for the Supreme Court to address this underlying circuit court split,” she said. “What may be of concern to the Supreme Court, however, is that if the 9th Circuit Court view is accepted, it will be almost impossible to dismiss a claim on statute of limitations grounds at the motion to dismiss stage. That is, until a defendant has had the opportunity either on discovery or deposition to ask a plaintiff is he/she read and comprehended a document, defendant will lack the requisite information.”

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