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News & Resources Financial Services​

​The Major Impact of New Plan Design, Provisions

​By: Ed Gimenez, CFP®, AIF®, RPA, Director of Retirement Plan Services​

The upswing in the number of plans utilizing automatic features and the associated managed investments is having a dramatic impact on participant accounts. Auto features include automatic enrollment and automatic contribution increases. These are very often accompanied by a Qualified Default Investment Alternative that is managed on the participant’s behalf.

Today’s private sector retirement plan system is dominated by defined contribution plans. More than 90 million Americans are covered by DC plans, holding their more than $6.5 trillion in assets.

In the 2015 entry in its series “How America Saves,” Vanguard examined their 2014 recordkeeping data to arrive at some high- level insights into the U.S. retirement system. It is interesting to compare the current report to those of earlier years, going back to the report’s genesis in 2000.

Of its 4,700 plan sponsors’ plans covering 3.9 million participants, Vanguard found that in 2014, 98% of plans defaulted participants into a balanced investment strategy, with 95% directing balances into a target date fund (TDF).

This emphasis on TDFs shows in several areas of the data. For example:

  • At year-end 2014, 39% of Vanguard participants were invested in a single TDF.
  • Eight out of 10 new plan entrants in 2014 were solely invested in a professionally managed account, often a TDF.
  • Eighty-eight percent of plan sponsors offered TDFs at the end of 2014, up 17% from 2009.
  • Sixty-four percent of all Vanguard participants use TDFs.

Vanguard expects to reach a milestone during 2015—it anticipates that during the year, half of all participants will be entirely invested in a professionally managed account, like a TDF, and that the figure will reach 63% by 2018.

The use of automatic features has grown by 50% since the end  of 2009, according to the report. Thirty-six percent of Vanguard’s plans had adopted automatic enrollment by the end of 2014. But, because large plans are more likely to offer automatic enrollment, 60% of all new plan entrants in 2014 were enrolled automatically.

What’s the result of all the emphasis on auto features? Median participant balances declined, according to Vanguard’s report. In 2014, the median participant account balance was $29,603 (the average was $102,682), 6% less than the prior year’s median.

While more people are now enrolled in their plan, they are often automatically enrolled at a low contribution rate.

On a positive note, the stock market’s strong performance in 2014 resulted in a median one-year participant total return of 7.2%,  and five-year participant total returns averaging 9.9%. In fact, for participants continuously enrolled between 2009 and 2014, the median account balance rose by an impressive 137%. The increase represents both investment returns and ongoing contributions.

Plan assets are very likely to be invested in equities, with 72% of them directed that way. A few participants take extreme positions with their investments; 8% invested 100% in equities, and 5% held none. The rise of TDFs seems to be resulting in less likelihood of these extreme positions.

Participant positions in employer stock continued their decline since Vanguard first observed the shift in 2006. Among plans offering company stock, the number of participants who have at least 20% of their balance invested there fell from 30% in 2009 to 28% in 2014. The number of plans actively offering company stock also declined to 10% in 2014.

the vanguard survey reflects data from more than 3.9 million participants.  ​ if you have any questions please contact ed gimenez at ed@raffafinancial.com or 240.403.2563.

Pension Plan Limitations for 2015
401(k) Maximum Participant Deferral
*$24,000 for those age 50 or older, if the plan permits
Defined Contribution Maximum Annual Addition
Highly Compensated Employee Threshold
Annual Compensation Limit