Vanguard Says Sweeps, Auto Enrollment Still Key in Combatting Savings Gaps

Retirement savings research driven by new modelling methods from the Vanguard Group shows some good results for higher-income earners but a daunting retirement readiness gap for lower-income workers that needs continued attention from the industry.

The Vanguard report released Tuesday found that lower-income workers spend significantly more of their pre-retirement income than those in the middle- or higher-income ranges and therefore face a greater shortfall for retirement readiness, even after accounting for Social Security. The researchers found the following results by annual income:

• $22,000: 96% of income spent before retirement (25th percentile)
• $42,000: 83% of income spent before retirement (50th percentile)
• $61,000: 68% of income spent before retirement (70th percentile)
• $173,000: 43% of income spent before retirement (95th percentile)

The result of that income spend-down, Vanguard found, is a greater need for participants to self-finance retirement beyond Social Security for those in the 50th percentile or lower of income brackets.

Addressing that shortfall is still possible, according to Dave Stinnett, head of strategic retirement consulting at Vanguard, if the retirement industry can continue to get more workers saving in tax-deferred retirement plans, and at higher rates.

“Advisers and plan sponsors can help workers save adequately by adopting best practices in retirement plan design: automatic enrollment, annual automatic escalation of savings rates and default investment into a portfolio of stocks and bonds appropriate for retirement goals,” Stinnett said in an emailed response. “Advisers have opportunities to help accelerate this progress.”

Automate It

The retirement industry may see auto-enrollment as a well-known tactic, and the SECURE 2.0 Act of 2022 will make it mandatory for new workplace plans in 2025. But Stinnett noted that, at the end of 2022, 42% of employer-sponsored DC plans on Vanguard’s recordkeeping system had not yet adopted automatic enrollment.

In the meantime, workers not participating in available plans can be brought in through re-enrollment campaigns, he noted.

“Plan sponsors can also amplify the impact of these design features by conducting re-enrollment campaigns that periodically default nonparticipants into the plan,” he wrote.

Finally, Stinnett points to automatic portability as a way for workers to keep their savings in tax-deferred workplace plans when moving jobs. One industry effort run by the Portability Services Network LLC—a collection of the country’s six largest recordkeepers—has begun a process this month to increase the use of auto-portability among member providers.

Vanguard’s research was based on a proprietary, internal tool using the asset manager’s capital markets forecasts and data on household balance sheets, savings rates and spending patterns to estimate retirement readiness across age groups.

The Vanguard Retirement Readiness Model was then combined with analysis of savers’ “sustainable replacement rate,” the percentage of pre-retirement income a worker can replace throughout retirement in 90% of market and mortality scenarios. That, as compared with the average retirement spending needs across generations, led to the projected savings gap.

Mixed Results

Overall, Stinnett noted, the model showed that younger generations have benefitted from defined contribution plan design, improved financial education and increased savings behaviors. But findings were mixed, with varying outcomes across 12 different income and generational cohorts.

For instance, among late Baby Boomers (ages 61 to 65), high-income workers are on track to meet their retirement spending needs, while low- and middle-income workers are off track. Millennial savers at the 50th income percentile, however, showed a greater chance of sustainable retirement income, according to Vanguard.

The asset manager created its baseline analysis assuming retirees depend on Social Security and financial assets from workplace retirement savings plans. Other factors that may increase or reduce retirement readiness include, according to Vanguard: access to home equity; working longer; investing in better-or-worse-than-expected capital markets; and experiencing a reduction in Social Security payments.

Beyond plan sponsors and advisers working to help participants meet retirement needs, the researchers also suggested changes policymakers—and individuals themselves—can make to create better outcomes.