Retirement Savings Rates Are Too Low, Vanguard Study Says

By Arthur Postal

WASHINGTON — The good news is that Americans are setting aside money for retirement. The bad news is that they are not setting aside enough.

A new study by Vanguard indicates that the average American is setting aside 7 percent of their income in retirement savings accounts. However, according to Vanguard, this is less than the optimum amount they should save in order to have a secure retirement.

The study says that, when taking employer contributions into account, the average American saves 10 percent of their income.

But the study says that Vanguard recommends that people who earn less than $50,000 annually should have a 9 percent total retirement savings contribution rate. Those with annual income between $50,000 and $100,000 should have a 12 percent total savings contribution rate. Workers who earn more than $100,000 annually should have a 15 percent savings contribution rate.

The study, released last week, said an important development in defined contribution plans is the increase in professionally managed allocations. Participants with professionally managed allocations have their entire account balance invested in a single target-date or balanced fund or a managed account advisory service.

As of the end of last year, 45 percent of all Vanguard participants were solely invested in an automatic investment, which compares with 25 percent at the end of 2009. The study also said 39 percent of all participants were invested in a single target-date fund. Another 2 percent held one other balanced fund and 4 percent used a managed account program.

“These diversified professionally-managed investment portfolios dramatically improve portfolio diversification compared with participants making choices on their own,” the report said. “Among new plan entrants — participants entering the plan for the first time in 2014 — eight in 10 were solely invested in a professionally managed allocation.”

Specifically, the study found that the use of target-date strategies in defined contribution plans continues to grow, with 88 percent of plan sponsors offering target-date funds as of year-end 2014. This was up 17 percent compared with year-end 2009.

The report said 97 percent of Vanguard participants are in plans offering target-date funds. Sixty-four percent of participants owning target-date funds have their entire account invested in a single target-date fund, the report said.

Four in 10 Vanguard participants are wholly invested in a single target-date fund, either by voluntary choice or by default.

“An important factor driving use of target-date funds is their role as an automatic or default investment strategy,” the Vanguard report said. “The qualified default investment alternative (QDIA) regulations promulgated under the Pension Protection Act of 2006 continue to influence adoption of target-date funds,” the report said.

“That said, voluntary choice is still important, with half of single target-date investors choosing the funds on their own, not through default.”

The life insurance industry fought intensely against inclusion of the QDIA provision in the 2006 law, as well as the rule implementing it that was issued by the Department of Labor (DOL) in 2007. That is because prior to the law, most default investments were in life insurance products, so-called guaranteed investment contracts (GICs). More than $100 billion in GICs issued by insurance companies were in GICs at the time the DOL rule was issued. GICs were a big business for insurers for decades in defined benefit plans, either in plans administered by insurers or administered by other vendors.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].