The financial readiness of Americans for retirement has been a focus of attention during the past few years, particularly after the severe stock market downturn of 2008-09. A new report shows utility employees who participated in their 401(k) or other defined contribution (DC) plan at Vanguard in 2010 tended to save at higher levels in the plan and have larger account balances than participants in Vanguard plans as a whole.
The findings are part of Vanguard’s “How America Saves 2011,” an annual report used widely as a barometer of retirement planning trends. Using 2010 data, “How America Saves 2011″ looks at the overall patterns of more than 3 million participants in plans record kept at Vanguard.
For the first time, supplemental industry benchmark reports to “How America Saves” analyze the behavior of plan participants in specific industries, including the utility industry. Plan sponsors in this industry can use a new benchmarking tool to compare their plan data with others in the industry and Vanguard plans overall.
Trends in participant behavior in the utility industry include:
- Plan participation. Average participation in DC plans at utility firms was higher than the Vanguard average participation rate of 74 percent. Plan participation was 92 percent for smaller utilities (with fewer than 1,000 employees) and 84 percent for larger utilities (more than 1,000 employees).
- Auto enrollment. Vanguard research has found that more employers (plan sponsors) are adopting automatic enrollment plans to boost participation among employees. Auto enroll plans can have a various features. Besides the actual automatic enrollment, employers can include an automatic annual increase in the payroll deferral rate (contribution rate) for participants and automatically earmark participant contributions to a default investment, such as a target-date fund, if they don’t choose an investment themselves. Employees always can opt out of the entire auto enroll program or individual features. In 2010, 48 percent of larger utilities and 28 percent of smaller utilities had auto enroll plans versus 24 percent of all Vanguard plans.
- Contribution rates. In a typical DC plan, employees are the main source of funding, contributing to their plans via payroll deferral.On average, participants in utility plans contributed more than those in all Vanguard plans. The average deferral rate was 9 percent for participants in plans at smaller utilities and 8.2 percent for those in the larger firm plans. For Vanguard plans in aggregate, the average deferral rate was 6.8 percent.
- Target-date funds. Target-date funds (TDFs), which are broadly diversified (stock and fixed income) funds that become more conservative the closer an investor gets to the fund’s stated retirement date, increasingly have become a dominant retirement investment option. More small plans in the utility industry offered TDFs (94 percent) than across all of Vanguard (79 percent) and larger utility plans (78 percent). Among participants using TDFs, however, those in the larger company plans invested more of their plan assets (53 percent) in them than did participants in the smaller plans (43 percent of their plan assets). This compares to the 41 percent of assets invested in TDFs by participants across all Vanguard plans offering the funds.
- Account balances. The account balances of participants in utility plans—an average of $129,286 for larger utility plan participants and $108,901 for participants in the smaller plans—were higher than those of participants in Vanguard plans collectively. The average Vanguard account balance was $79,077. Current balances, however, are only a partial measure of retirement preparedness for many participants. A more accurate reflection of retirement readiness includes the participant’s plan balance in addition to age, plan tenure, expected Social Security income and assets in personal savings, other employer plans or a spouse’s retirement plan.
Investments in target-date 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 work force. The fund gradually will shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.