Participants in retirement plans administered by Vanguard Group are so willing to allow professional managers to handle their investments that 80% could be using that approach within five years, according to a Vanguard survey issued Tuesday.
Vanguard defines professionally managed allocations as target-date funds, balanced funds and managed accounts.
Last year, 59% of participants in plans for which Vanguard is a record keeper put all of their retirement money into one of those professionally managed options. By 2023, Vanguard predicted 80% of participants would use this strategy, said the annual survey, How America Saves.
Target-date funds continue to dominate the professionally managed allocations, and they will play a leading role in the overall embrace by participants of professionally managed options, said a Vanguard report describing the survey.
Last year, 52% of participants invested all retirement money in a target-date funds, 3% used a balanced fund and 4% used a managed account program. The overall impact of these professionally managed options could even exceed the 80% estimate thanks to new participants in retirement plans, Jean Young, senior research associate with the Vanguard Center for Investor Research, said in an interview.
The rising rate of professionally managed allocations "is being driven by new entrants and auto enrollment," said Ms. Young, lead author of How America Saves.
Last year, she said, 87% of new participants chose a professionally managed option compared to 87% in 2017 and 85% in 2015.
Automatic enrollment continues to prod greater retirement plan investing, as 48% of Vanguard's record-keeping clients offered auto enrollment last year. Because larger plans are more likely to offer auto enrollment, the Vanguard report said 66% of all new plan entrants were enrolled through auto enrollment.
And as auto-enrollment rates rise, so do default rates as a majority of plans set rates above the traditional 3%.
Among plans offering auto enrollment last year, 15% set a 4% rate, 15% set a 5% rate and 23% established a rate of 6% or higher.
These rates have increased in recent years — most notably 6% higher, which was offered by only 10% of plans in 2010.
Last year, the 3% default rate was offered by 40% of plans, well below the peak of 57% of plans in 2010.
The Vanguard report also noted that target-date funds' growth has been spurred by their use as qualified default investment alternatives. "That said, voluntary choice is still important, with nearly half of single target-date investors choosing the funds on their own — not through default," the report said.
The growth of target-date funds has led to less trading by participants, the report said. "Over the past decade, we have observed a decline in participant trading," which is "partially attributable to participants' increased target-date funds," the report said. Only 2% of participants holding a single target-date fund made a trade last year.
Vanguard had more than $1.4 trillion in DC assets under management as of March 31, 2019. Vanguard is the record keeper for defined contribution plans with more than 5 million participants.
About 90% of the plans for which Vanguard is a record keeper are 401(k) or 403(b) plans. The rest are employer-contributory DC plans, such as profit-sharing or money purchase plans, in which investments are directed by participants, the report said.
