The percentage of defined contribution plans using auto enrollment rose to 41% in 2015 from 36% in 2014 and 10% in 2006 when the Pension Protection Act was enacted, said Vanguard Group’s latest annual analysis of plans for which it is record keeper.
As a result, more than 75% of eligible employees now participate in their workplace DC plan, up from 66% in 2006, the report found. Among it provisions, the PPA of 2006 formally authorized the use of auto enrollment.
Within auto enrollment, plan executives are also moving toward stronger default designs, said Jean Young, senior research analyst in Vanguard’s center for retirement research and lead author of the report, in a telephone interview.
Of the 41% of plans using automatic enrollment in 2015, 43% used default deferral rates or 4% or more, compared to 39% in 2014 and 25% in 2006.
However, most plans (57%) are still using default deferral rates of 3% or less, the report noted, adding that automatic enrollment can lead to lower contribution rates when default deferral rates are set too low. Ms. Young said that she recommends contribution rates of 9% to 15% or more, including an employer match.
The PPA also sanctioned the use of target-date funds as a qualified default investment alternative. The report found that 90% of plan executives offered target-date funds in their investment lineups in 2015, compared to 88% in 2014 and 43% in 2006. In 2015, 98% of Vanguard participants had access to target-date funds and 69% of all Vanguard DC participants were invested in them, compared to 97% and 64%, respectively, in 2014, and 46% and 10% in 2006.
Ms. Young added that the increased use of target-date funds is reshaping portfolio allocations and outcomes, noting that young people, who have “historically surveyed as risk-averse,” had low equity allocations in 2006 and more appropriate equity allocations in 2015. According to the report, participants younger than 25 had an average equity allocation of 88% in 2015, up from 61% in 2006.
“Plan sponsors — and the industry as a whole — must bear the responsibility to continue the significant progress impelled by the PPA, including driving improved savings rates for all participants,” said Martha King, managing director and head of Vanguard’s institutional investor group, in a news release on the report.
Vanguard’s annual report, “How America Saves,” is based on records of about 1,900 DC plans for which Vanguard is the record keeper with about 3.9 million total participants.
The full report is available on Vanguard's website.