The way Americans build their retirement nest egg has changed over the past few decades. Gone are the days where a company pension served as the cornerstone of retirement assets for many Americans.
Now, an employer’s defined contribution plan, like a 401(k) or a 403(b) plan, is where a majority of Americans save for the future.
Today, more than 94 million Americans have defined contribution retirement accounts with assets totaling more than $7 trillion, according to a new report from Vanguard on “How America Saves.” As the report points out, how we save in such plans has also undergone significant change.
Here are six trends in how Americans are saving for retirement. How do your retirement savings practices stack up? In this case, it’s a good thing to stay with the trend, so that your retirement savings has begun.
- A record number of Americans save automatically. Since 2007, the number of retirement plans using automatic enrollment features has increased by 300 percent, with more than 60 percent of contributing participants now in plans that offer automatic enrollment. That is good news for savers, because plans with automatic enrollment have a 90 percent participation rate. The vast majority of plans (97 percent) default participants into an age-appropriate target-date fund.
- More participants have money in professionally managed fund options. In 2016, 53 percent of retirement plan participants had money invested in funds that used professionally managed allocation strategies, such as target-date funds or balanced funds (funds that own both stocks and bonds). This is more than double those who used such savings vehicles in 2009, when just 25 percent of savers had retirement assets in these types of funds. According to the report, of the participants in these professionally managed options, 46 percent owned target-date funds.
- Stocks dominate. Plan assets invested in equities—typically through stock-based mutual funds or exchange-traded funds—stood at 71 percent in 2016, compared to 61 percent in 2008. In recent years, household income has been less a factor in determining who invests in equities than it used to be. Today, the percent of assets allocated to stocks and stock funds is 73 percent for those with household incomes less than $30,000—and 74 percent for those with household incomes that exceed $100,000. Age, however, is a factor: In 2016, 90 percent of participants under age 45 had some exposure to equities, while only 46 percent of participants older than 65 invested in equities.
- Participants are diversifying away from their employer’s stock. Fewer Americans are holding concentrated positions of company stock in plans that offer such investments. In 2016, 24 percent of retirement plan participants had 20 percent or more of their account balance held in company stock, down from 32 percent in 2007.
- Participants trade less often. In 2008, 16 percent of plan participants made one or more portfolio trades or exchanges (moving assets from one investment option offered by the plan to another). In 2016, only 12 percent did so. The vast majority of participants made no trades at all in 2016. While this is less surprising when you consider the rise of target-date funds, ask yourself each year whether your 401(k) is in need of a checkup or a rebalance so you build discipline into your investment plan.
- Participants save more than you might think. Plan participants covered by the report saved an average of 6.2 percent of their income in their employer’s plan, with a median savings rate of 5 percent. This means half the participants saved more than 5 percent and half saved less. Meanwhile, 10 percent are strong savers indeed, putting away the IRS maximum of $18,000 or $24,000 for those aged 50 or older.