Automatic Enrollment Boosts Participation for All Racial and Ethnic Groups
VALLEY FORGE, PA, October 10, 2011 -- New Vanguard research on diversity and retirement plan saving and investing shows that automatic employee enrollment into company 401k plans raises participation—the critical first step in taking advantage of these plans—for all racial and ethnic groups. The increase is particularly notable for blacks and Hispanics, especially low earners.
"This study confirms that the use of automatic plan design does reduce racial and ethnic disparities in saving and investing behavior through defined contribution retirement plans," said Cyndy Pagliaro, a Vanguard researcher and lead author of the report, which is the first in a series examining diversity and DC plan savings. "Plan sponsors concerned about these disparities should consider automatic plan design, but it must be carefully planned to ensure adequate long-term retirement savings for all groups."
While other industry studies have looked at differences in saving and investing behaviors among racial and ethnic groups, the Vanguard study, In Diversity and Defined Contribution Plans: the Role of Automatic Plan Features, is the first to take an in-depth look at the impact of automatic enrollment into 401k and other defined contribution (DC) plans on these trends.
Participation rate jumps more than 60% for blacks, 40% for Hispanics
Auto enrollment dramatically improves the plan participation rate for blacks—from 57% under voluntary enrollment to 94% through automatic enrollment, a relative increase of more than 60%. The Hispanic participation rate also jumps, from 67% under voluntary enrollment to 95% through automatic enrollment, a relative increase of over 40%. Auto enrollment participation rates are also much higher among whites and Asians.
Automatic enrollment is particularly important for low-income blacks and Hispanics, who are far less likely to participate in a DC plan under voluntary enrollment. The participation rate in voluntary enrollment plans among black workers earning less than $30,000 a year is only 35%; it is 36% for Hispanic workers in the same income group. These rates jump to 93% and 94%, respectively, under automatic enrollment.
Whites, Asians tend to override default deferral rates, contribute more
Automatic enrollment does not necessarily reduce racial and ethnic group differences in plan savings rates. Whites and Asians are more likely to override their plan’s default deferral (contribution) rate and choose a higher one. As a result, deferral rates for whites and Asians with auto enrollment are about 0.5 to 2 percentage points higher than those for blacks and Hispanics. The researchers noted that an automatic annual escalation of deferral rates raises them across the board, and over time may also mitigate differences in plan savings rates among these groups.
Diversified funds help Asians, whites, blacks be less extreme equity investors
In automatic enrollment plans, many participants are defaulted into an automatic investment program, such as a target-date fund. These broadly diversified funds inherently reduce many of the extreme asset allocations seen in voluntary enrollment plans. For example, in voluntary enrollment plans, Asians and whites are more likely to be aggressive equity investors; blacks are more apt to be zero-equity investors. By smoothing those allocations, a target-date fund reduces differences in risk-taking among these groups.
Vanguard researchers analyzed 2010 data for more than a quarter million participants in seven large defined contribution plans (DC) recordkept at Vanguard with various automatic plan features.
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.
Resources: www.vanguard.com/diversity
About Vanguard
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies. Vanguard manages approximately $1.55 trillion in U.S. mutual fund assets, including more than $150 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 more than 3.4 million participants in nearly 2,400 plans. Vanguard is also a major provider of investment, advisory, and recordkeeping services to defined benefit plans. For more information, please visit www.vanguard.com.
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