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Pension Protection Act Working Magic on 401(k)s
August 28, 2008
The Pension Protection Act is succeeding at encouraging employers to automatically enroll and annually increase contributions for workers, Vanguard has found in an analysis of the defined contribution plans it administers.
Three hundred of the plans that Vanguard serves in the U.S., or 15%, automatically enrolled their employees in their defined contribution plans last year, Vanguard found. That’s triple what it was in 2005. But because these plans are run by larger employers, one-third of the individuals that Vanguard serves in its defined contribution plans are now automatically enrolled.
And of the plans with auto enrollment, two thirds automatically increase contribution rates each year, whereas only one third did so two years prior.
Vanguard expects these trends to continue in the near future, thanks to the Pension Protection Act.
Likewise, the overwhelming majority of plans with auto enrollment, 96%, are using either lifestyle or target-date funds as the default investment choice. Roth 401(k)s are also gaining traction, with 24% of plans offering them in 2007 and 6% of participants in those plans taking advantage of them.
“Defined contribution plans have become the most important retirement savings vehicle for private sector U.S. workers,” said Steve Utkus, head of the Vanguard Center for Retirement Research. “Helping more people access these plans, encouraging greater savings rates and providing ready-made, diversified investment portfolios can make a real difference in retirement security.”
Among all of the plans that Vanguard manages, it found that 75% of employees at companies with 401(k) plans in 2007 contributed to the plans, at an average rate of 7.3%. This has principally held steady since 2000.
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