Concerns about Americans' retirement readiness — or lack thereof — continue to make national headlines. But a new report by The Vanguard Group Inc. indicates that many 401(k) participants are on the right track — thanks in large part to their use of financial advisers.
In 2012, more than a third of the more than 3 million participants in 401(k) retirement plans at Vanguard invested their plan assets in a professionally managed investment option, according to a new report from the fund firm. In 2007, that figure was only about 17%. Vanguard expects half of all 401(k) plan participants to be invested in professionally managed offerings by 2017.
“It represents a shift in responsibility for investment decision making away from participants — many of whom may be inexperienced investors — to investment and advice programs that have been vetted by employers as part of their fiduciary obligations,” said Jean Young, co-author of the report.
The switch seems to be paying off. According to
Vanguard's research, savers with a professionally managed 401(k) product dramatically improved their portfolio diversification, potentially making the participants more financially prepared for retirement than those going it alone.
Of the plan participants embracing professional advice in 2012, more than a quarter were invested in a single target-date fund. About 6% held a single traditional balanced fund, and 3% used a managed-account advisory program. In addition, 14% of participants who were offered an investment advice service through their plan adopted one.
"The number of participants completely turning their portfolio construction over to a professional, or obtaining advice from professionals, is an important trend in the potential future financial security of retirees,” Ms. Young said.
Average plan account balances rose by 10% in 2012, to $86,212, reflecting the effect of both contributions and a buoyant stock market.
“Some may look solely at plan account balances and underestimate the retirement readiness of Americans, saying that most of us still aren't financially prepared for retirement,” said Steve Utkus, director of the Vanguard Center for Retirement Research, who also worked on the report. “But when you look at the data comprehensively, many Americans are doing a good job accumulating private savings to supplement Social Security in retirement."
Although the average employee deferral rate was just 7% in 2012, many of the more than 3 million participants saved much more. One-fifth saved 10% or more, 11% saved the maximum $17,000 allowed and 15% of participants over 50 made catch-up contributions in 2012 ($22,500). Not surprisingly, participants who contributed the maximum dollar amount tended to have higher incomes, were older, were more likely to be male and had longer tenures with their current employer. They also had accumulated substantially higher account balances than the average participant.
Taking into account both contributions made by participants and those made by employers to participants' accounts, the average total savings rate was 10.5% in 2012.
But not all the news was positive. Vanguard noted that the average employee deferral rate slipped to 7% in 2012, down slightly from the peak of 7.3% in 2007. Perversely, the decline is largely due to the success and proliferation of automatic enrollment plans. Although such plans, which automatically enroll employees unless they opt out, raises plan participation rates, the default rates are often set too low (3% or less) and thus pull down the overall average savings rate.
Vanguard, which markets employer-based savings plans, recommends an annual savings rate of 12% to 15%, depending on income level. “While we are seeing good news overall in the retirement planning habits of participants, many Americans are still not saving enough for the future,” Ms. Young said. “Simply put, people need to save more and save more now.”
The report also found that Roth 401(k) options are gaining acceptance in the workplace. Nearly half of all Vanguard plans offering participants a chance to accumulate retirement savings that offer tax-free distributions in retirement. Only 11% of participants, however, have gone with the Roth option so far. Those who did tended to be younger and shorter-tenured participants.
Only 4% of plans offered the relatively new
Roth in-plan conversion option, which allows participants to roll over some or all of their traditional 401(k) balance to a Roth and pay taxes on the converted amount. Less than 1% of participants with access to that option converted assets between 2010 and 2012.
