Vanguard: More 401(k) Plan Participants Benefiting from Professional Investment Management Help; Average Account Balances Up 10%

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In 2012, 36% of all participants in 401(k) retirement plans at Vanguard invested their plan assets in a professionally managed investment option, dramatically improving their portfolio diversification and potentially making them more financially prepared for retirement compared with participants making investment choices on their own. Average plan account balances rose by 10% in 2012, to $86,212, reflecting the effect of both ongoing contributions and market returns.

In 2012, 36% of all participants in 401(k) retirement plans at Vanguard invested their plan assets in a professionally managed investment option, dramatically improving their portfolio diversification and potentially making them more financially prepared for retirement compared with participants making investment choices on their own. Vanguard estimates that 55% of all participants will be entirely invested in a professionally managed investment option by 2017.

According to Vanguard’s How America Saves 2013, an annual report widely used as a barometer of U.S. retirement planning trends, 27% of all participants in 2012 were invested in a single target-date fund, 6% held a single traditional balanced fund, and 3% used a managed account advisory program. The total number of participants invested in a professionally managed allocation has more than doubled from 17% at the end of 2007.

Furthermore, 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,” said Jean Young, co-author of How America Saves. “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.”

Average plan account balances rose by 10% in 2012, to $86,212, reflecting the effect of both ongoing contributions and market returns. For participants with a balance at both the end of 2007 and the end of 2012—the worst five-year period in the markets in most people’s lifetimes—the median account balance grew by 67% for the same reasons. Nearly 90% of participants in this group saw their balances rise during this time.

“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, co-author of How America Saves, and a blogger who has written extensively about retirement readiness. “But when you look at the data comprehensively, the fact remains that many Americans are doing a good job accumulating private savings to supplement Social Security in retirement."    

Indeed, many participants are strong savers in their plan. One-fifth of them saved 10% or more, 11% saved the maximum allowed, and 15% of participants over age 50 made catch-up contributions in 2012. 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.

On the other end of the spectrum, one-third of participants contributed less than 4% themselves. The average participant deferral rate was 7% in 2012, down slightly from the peak of 7.3% in 2007. The decline is largely due to the default contribution rates set by many automatic enrollment plans. Although automatic enrollment raises plan participation rates and thus helps to ensure that more people overall save for retirement, the default rates are often set too low (3% or less) and thus pull down the overall average savings rate.

Vanguard recommends an annual savings rate of 12% to15%, 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.”

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
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Mutual funds are subject to risks, including possible loss of principal. Investments in bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks including currency fluctuations and the potential for adverse development in specific countries or regions. Diversification does not ensure a profit or protect against a loss in a declining market.

For more information about Vanguard funds, visit http://www.vanguard.com, or call 800-662-7447, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard Marketing Corporation, Distributor.

© 2013 The Vanguard Group, Inc. All rights reserved.

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Linda Wolohan
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