Manufacturing And The Future Of The 401(k)
VALLEY FORGE, PA -- The financial readiness of Americans for retirement has been a focus of attention in the last few years, particularly after the severe stock market downturn of 2008-2009. A new report shows that employees of larger manufacturing companies who participated in their 401(k) or other defined contribution (DC) plan at Vanguard in 2010 tended to have higher account balances than their counterparts in smaller manufacturing company plans and Vanguard plans as a whole.
The findings are part of Vanguard's How America Saves 2011, an annual report that is a widely used 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 recordkept at Vanguard.
For the first time, supplemental industry reports to How America Saves analyze the behavior of plan participants in specific industries, including the manufacturing 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.
Here are notable trends in participant behavior in the manufacturing industry:
- Plan participation. Average participation in DC plans at large manufacturing companies (with more than 1,000 employees) was higher (77 percent) than the Vanguard average participation rate of 74 percent. Plan participation was 71 percent for smaller manufacturing companies (fewer than 1,000 employees).
- Auto enrollment. Vanguard research has found that more employers (plan sponsors) are adopting automatic enrollment plans as a way to boost participation among employees. Auto enroll plans can have a variety of features. Besides the actual automatic enrollment, employers can choose to include an automatic annual increase in the payroll deferral rate (contribution rate) for participants and can choose to automatically earmark participant contributions to a default investment, such as a target-date fund, if they don't choose an investment themselves. Employees always have the ability to opt out of the entire auto enroll program or individual features. In 2010, 67 percent of larger manufacturing companies had an auto enroll plan versus 23 percent of the smaller firms and 24 percent of all Vanguard plans.
- Contribution rates. In a typical DC plan, employees are the main source of funding, contributing to their plan via payroll deferrals.On average, participants of smaller manufacturing company plans contributed the same amount of their income (6.8 percent) as those in all Vanguard plans. The average deferral rate was 6.5 percent for larger manufacturing firm plans.
- 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, have increasingly become a dominant retirement investment option. More large plans in the manufacturing industry offered TDFs (92 percent) than across all of Vanguard (79 percent) and smaller manufacturing plans (75 percent). However, among participants using TDFs, those in smaller company plans invested more of their plan assets (55 percent) in them than did participants in the larger plans (40 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. At $82,164, the average account balance of participants in larger manufacturing company plans was higher than those of participants in Vanguard plans collectively ($79,077). The average account balance for participants in the plans of smaller manufacturing companies was $71,163. It is important to note, however, that current plan balances 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 that may be in personal savings, other employer plans, or a spouse's retirement plan.
Manufacturing Firms 2011: Industry Benchmark Data Supplement to How America Saves is based on Vanguard's 2010 data for more than 873,000 participants in 612 qualified defined contribution plans offered by manufacturing firms and recordkept at Vanguard.
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 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-date fund is not guaranteed at any time, including on or after the target date.
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world's largest investment management companies. Vanguard manages more than $1.7 trillion in U.S. mutual fund assets, including more than $160 billion in ETF assets. Vanguard offers more than 170 index and actively managed funds to U.S. investors and more than 60 additional funds in non-U.S. markets. Vanguard provides investments to more than 8,500 defined contribution plans, including recordkeeping and investment services to 3.2 million participants in over 2,500 plans. Vanguard is also a major provider of investment, advisory, and recordkeeping services to defined benefit plans.