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By Christine Benz | 10-23-2014 04:00 PM

More Workers Get in on 401(k)s

Automatic enrollment has pushed participation rates in Vanguard employer-sponsored plans above 75%, but the average contribution rate has dipped, according to Vanguard's annual How America Saves study.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Each year, Vanguard releases a report detailing how and what investors in Vanguard-managed company retirement plans are doing. I recently sat down with Jean Young at Vanguard to discuss some of the findings.

Jean, thank you so much for being here.

Jean Young: It's my pleasure.

Benz: Vanguard puts out an annual How America Saves report that looks at 401(k)-plan and other company-plan participant behavior. Let's talk about some of the findings. In a lot of ways, some of the numbers here are pretty encouraging. One is that you've seen an uptick in participation rates. Let's talk about some of the numbers that you are looking at there.

Young: Over the past decade, we are seeing a general uptick in participation rates, probably from around, I'd say, two thirds when you look at the participant--the individual level--to north of 75%. And all of that improvement is attributable to the rising adoption of automatic enrollment. About a third of the plans we work with have adopted automatic enrollment, and automatic enrollment tends to have been adopted by larger plans.

About two thirds of the participants are in plans that now have automatic enrollment design. So, we're seeing this steady uptick in participation rates, which is a good thing.

Benz: One thing that goes hand in hand with participation rates is contribution rates. And one thing that I know that you noted in the report is that the participation rate may go up, but contribution rate doesn't necessarily follow suit, and those two things are connected. Let's talk about that relationship.

Young: There's been a small dip in the average contribution rate, although the median contribution rate has been perfectly flat for the last 10 years, at 6%. But we've seen a small dip, on average, from 7.3% to around 7% in the average contribution rate. And that is all attributable to the designs that plan sponsors choose for automatic enrollment. Half of plan sponsors choose 3% as the default deferral rate.

Now, the good news is that 69% of the plans we work with also have implemented annual increases. So, as long as you couple the annual increase in with the default deferral rate, you're going to get to, typically, a decent savings rate.

The other thing is that people focus on the individual deferral rate, but we're also able to measure the aggregate or total contribution rate. Ninety percent of the plans we work with do make an employer contribution, either a match or a profit-sharing type of contribution--or sometimes both. And when we look at the aggregate contribution rate, on average, it's around 10%. And at the median, it's close to 10% as well.

So, while we would suggest that our participant base needs to be targeting a total savings rate of 12% to 15% or more, certainly you don't hear a lot about the fact that the typical participant is saving 10% in these plans.

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