Vanguard: Auto-Enrollment Has Most Significant Role in Equalizing Savings Access

Automatic enrollment is so far the most powerful tool in eliminating disparities among retirement plan savers, according to new research by Vanguard.

When examining a sample of 14 large defined contribution plans across nine plan sponsors, Vanguard found that automatic enrollment had the most significant influence on the participation rates of lower-paid employees, especially Black and Hispanic employees: The participation rates of lower-income Black and Hispanic employees were 2.5 times higher in companies that automatically enrolled employees into their plan, according to the report.

Six of the plans that Vanguard analyzed have an automatic enrollment design, with initial default rates ranging from 2% through 5%, and the remaining eight plans have a voluntary enrollment design.

Participation rates for those in voluntary enrollment plans varied significantly across races, but participation rates among those in auto-enrollment plans were much more consistent across the board.

For example, Black employees in voluntary enrollment plans had a 52% average participation rate, whereas white employees in voluntary enrollment plans had an average participation rate of 73%. The difference is much smaller for those automatically enrolled, as Black employees had a 90% average participation rate, and white employees had a 92% average participation rate.

“By far, I think the biggest takeaway from this is that … automatic enrollment is a benefit, [or] a tide, that lifts all boats,” says David Stinnett, a principal of strategic retirement consulting at Vanguard. “With this report, we’re no longer speculating. This study forcefully shows that how you use modern plan design can significantly drive better outcomes and be much more equitable in those outcomes.”

Total savings rates of employees across all racial and ethnic groups earning an income of $75,000 or less differed significantly between those who were automatically enrolled and those who voluntarily enrolled. For instance, the average savings rate for Hispanic employees in a voluntary enrollment plan was 4.9%, whereas the average savings rate for the Hispanic employees in an auto-enrollment plan was 8.3%.

However, Vanguard also found that participants in automatic enrollment plans were significantly more likely to have taken a hardship withdrawal. Stinnett argues that this trend is likely due to the fact that the automatic enrollment plans considered have more lower-compensated employees participating than the voluntary plans.

Employees in a voluntary enrollment plan are likely also facing financial hardships, but Stinnett says since they may not be participating in a plan, they are taking withdrawals from sources other than their retirement plan and addressing that hardship elsewhere.

“I think you could make the case that it’s better for [workers] to be in the plan, because at least then they have a balance to take out, and if they’re in the plan, they’re getting a match on that,” Stinnett says. “You never like to see more hardship withdrawals, but it’s not necessarily a strong critique of automatic plan designs.”

Besides automatic enrollment, other plan design features such as offering professionally managed allocations and advice services can also promote equity in retirement savings.

Within Vanguard’s sample, 58% of participants had a professionally managed allocation, 52% were pure target-date investors and 6% were using managed account advice.

Vanguard found that the rising use of professionally managed allocations is influencing extreme portfolio allocations, such as a 100% allocation to equities. The research showed only 4% of participants using professionally managed allocation had their entire account balance allocated to equities. As Black and Hispanic investors were more likely to have a professionally managed allocation—many being pure target-date investors—they were also less likely to hold an extreme equity allocation.

Stinnett adds that increased access to low-cost advice and digital robo-advice services is a positive step from an equity perspective.

“There are periods of volatility in the marketplace, and it’s very comforting when all of your wealth is in the plan and you know that you have professional assistance in how your saving behavior and investing behavior is going,” Stinnett says.

For the 59% of plan sponsors that have already adopted these modern design features studied, Stinnett says this research should be validating, as auto-enrollment and other features are driving better outcomes.

“For those plan sponsors who have yet to adopt [these features], I think [the research] serves as even more encouragement that you should be in your committees discussing, debating and considering these modern plan design features,” he says.