vanguard dc

June 2011

Defined contribution (DC) retirement plans are the centerpiece of the private-sector retirement system in the United States. More than 60 million Americans are covered by DC plans, with assets now in excess of $4 trillion.

Vanguard is at the forefront of the DC marketplace with more than $400 billion in DC plan assets. In our full-service DC recordkeeping business alone we serve 1,700 plan sponsors and more than 3 million participants. As an industry leader, Vanguard recognizes that it’s important to have a detailed understanding of DC plans and the role they play in the U.S. retirement system. Accordingly, we are pleased to present How America Saves 2011: A report on Vanguard 2010 defined contribution plan data. In this tenth edition, we update our analysis of DC plans and participant behavior, based on 2010 Vanguard recordkeeping data.

The first edition of How America Saves was published in 2000, based on 1999 Vanguard recordkeeping data. Initially the publication was updated biennially. However, our readers requested more frequent updates, so in 2004 we began publishing annually. This year we are pleased to further enhance the value of the report by introducing a series of benchmark data supplements for selected industry sectors. A list of the sectors we are covering in the series is on page 89.

Average participant account balances have now recovered, and at year-end 2010, reached their highest level since we began tracking this data in 1999 in the first edition of How America Saves. We are pleased to report that overwhelmingly participants “stayed the course” throughout the great recession; their saving and investment behavior changed only marginally.

We are confident that this report will continue to serve as a valuable reference tool and that our observations will prove useful as your organization continues to develop its retirement programs.

Sincerely,

1

R. Gregory BartonManaging DirectorInstitutional Investor Group

Contents

4 Executive summary

7 Market overview

8 Highlights at a glance

9 DC retirement plans

10 Accumulating plan assets

40 Managing participant accounts

72 Accessing plan assets

88 Figure index

89 Methodology

89 Acknowledgements

Managing

42 Asset and contribution allocations

49 Plan investment options

56 Target-date funds

62 Other investment features

66 Investment returns

68 Exchange activity

Accessing

74 Plan loans

78 Plan withdrawals

79 Plan distributions and rollovers

85 Access methods and the internet

Accumulating

12 Plan design

14 Employer contributions

18 Automatic enrollment designs

21 Participation rates

26 Employee deferrals

34 Aggregate contribution rates

36 Account balances

3

During 2007–2010, plan participants endured a substantial period of stock market volatility associated with the global financial crisis, including a decline of stock prices of more than half. As of year-end 2010, the U.S. stock market remained 20% below its peak of October 2007. Despite the exceptional volatility that marked the period, the saving and investment behavior of defined contribution (DC) plan participants changed only marginally. In many ways, DC plan participants’ lack of response to recent volatility is striking, although it is not surprising, given the inertia associated with much retirement savings behavior. During this interval, inertia likely benefited many participants. As we move beyond the 2008–2009 crisis period, the challenges remain largely the same: improving plan contribution rates and portfolio diversification.

Improved account balances

In 2010, median ($26,926) and average ($79,077) account balances reached their highest level since we began tracking this data in 1999 in How America Saves. In 2010, median account balances rose by 16% and average balances rose by 14% from 2009 levels as a result of improving markets and the impact of ongoing contributions. The majority of participants had account balances at year-end 2010 that were higher than they were in 2007. We examined the change in account balances for continuous participants—those with a balance at both year-end 2007 and year-end 2010. Among this group, the median account balance rose by 31% during this period, reflecting the dual effect of improving investment returns and ongoing contributions. Over this three-year period, 8 in 10 participants saw account balances stay flat or rise.

Growth in use of target-date funds

Target-date funds’ importance in DC plans continues to grow. Seventy-nine percent of plan sponsors offered target-date funds at year-end 2010, up more than

twofold from 3 in 10 at year-end 2005. Forty-two percent of all participants use target-date funds. Forty-eight percent of participants owning target-date funds have 100% of their account in a single target-date fund. Twenty percent of all 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 qualified default investment alternative (QDIA) regulations established by the Pension Protection Act of 2006 (PPA) continue to drive adoption of target-date funds. As of year-end 2010, 6 in 10 Vanguard DC plans have designated a QDIA, whether for automatic enrollment or other default purposes. Of plans choosing a QDIA, 89% have selected a target-date fund and 11% a balanced fund as their default investment. The QDIA regulations have had a major influence on default investment strategies for plans offering automatic enrollment. Only 1% of Vanguard plans with automatic enrollment still use a money market or stable value fund as their default investment, down from 25% in 2005.

Professionally managed allocations

An important development in DC plans is the rising prominence of professionally managed allocations. Participants with professionally managed allocations are those who have their entire account balance invested solely in a single target-date or balanced fund or a managed account advisory service. At year-end 2010, 29% of all Vanguard participants were solely invested in an automatic investment program—compared with just 9% 5 years ago. Twenty percent of all participants were invested in a single target-date fund; another 6% held one traditional balanced fund; and 3% used a managed account program. These diversified, professionally managed investment portfolios have the potential to dramatically improve portfolio diversification for these participants.

4 > Executive summary

Executive summary

High-level savings metrics

High-level metrics of participant savings behavior declined slightly in 2010. The 2010 plan participation rate was 74%, down 2 points from 2009 and back to levels last seen in 2004. Increases in plan participation related to the growing use of automatic enrollment were more than offset by declines in participation caused by difficult economic conditions. The average deferral rate in 2010 was 6.8% and the median was 6.0%, unchanged from 2009. However, average deferral rates have declined from their peak in 2007 of 7.3%. We estimate that about half of the decline in contribution rates is likely caused by economic conditions, and half is attributable to increased adoption of automatic enrollment. While automatic enrollment increases participation rates, it also leads to declining plan contribution rates, because default deferral rates are typically set at 3% or lower.

While aggregate savings statistics have weakened modestly, there has been a marked increase in participation rates among lower-income, younger, and newly hired employees—again attributable to automatic enrollment. Participants earning less than $30,000 had a participation rate of 50% in 2010, up 7 percentage points from 2005. Similarly, the participation rate for employees younger than 25 rose to 41% in 2010, up from 30% in 2005.

Steady use of automatic savings features

While the adoption of automatic enrollment has more than quadrupled since year-end 2005, growth in calendar-year 2010 was more modest. At year-end 2010, 24% of Vanguard plans had adopted automatic enrollment, up 3 percentage points from 2009. It remains to be seen whether the slowdown in plan sponsor adoption of automatic enrollment is related to current economic conditions or if adoption of the feature has reached a plateau. In 2010, 45% of large plans had an automatic enrollment feature, compared with 43% in 2009.

About half of all contributing participants in 2010 were in plans with automatic enrollment, although the automatic enrollment feature was typically applied only to new plan entrants. Three-quarters of automatic enrollment plans have implemented automatic annual deferral rate increases, up from about one-third in 2005. Almost all plans with automatic enrollment (99%) default participants to a balanced investment strategy—with 9 in 10 choosing a target-date fund as the default.

Roth 401(k) adoption

At year-end 2010, the Roth feature was adopted by 4 in 10 Vanguard plans and 9% of participants within these plans had elected the option. We anticipate steady growth in Roth adoption rates, given the Congressional action making the provision permanent and the tax diversification benefits the feature affords.

Presence of index core options

Given the growing focus on plan fees, there is increased interest among plan sponsors in offering a wider range of low-cost passive or index funds. A “passive core” is a comprehensive set of low-cost index options that span the global capital markets. In 2010, 40% of Vanguard plans offered a set of options providing an index core. Because large plans have adopted this approach more quickly, about half of all Vanguard participants were offered an index core as part of the overall plan investment menu.

Shift in participant investment allocations

The percentage of plan assets invested in equities rose to 68% in 2010, up from 66% in 2009. Equity allocations were five points below the 73% reached at year-end 2007, just after the peak of global stock prices. We estimate that over the 2007–2010 period, 2 points of the decline came from traders shifting assets to fixed income holdings on a net basis, while 3 points came from declining stock prices.

Executive summary > 5

implemented under the PPA; and ongoing communications about company stock risk, also required under the PPA.

Rise in loan activity

New loan issuance rose in 2009 and 2010, returning to prerecession levels of 2005. In 2010, 18% of participants had a loan outstanding and the average loan balance was $9,000. Only about 2% of aggregate plan assets were borrowed by participants.

Growth of in-service withdrawals

The number of hardship withdrawals grew 47% over the 2005–2010 period; however, at 2.2% of participants in 2010, the percentage of participants taking hardship withdrawals is still low on an absolute basis. The number of in-service nonhardship withdrawals also grew over this period by 56%. During 2010, 4% of participants took an in-service withdrawal, taking about 30% of their account balances. All in-service withdrawals during 2010 amounted to 1% of aggregate plan assets. In general, the recent weak economic conditions appeared to be affecting a small minority of participants.

Assets largely preserved for retirement

Participants separating from service largely preserved their assets for retirement. In 2010, 8% of participants left their employer and were eligible for a distribution. The majority of these participants (70%) continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 92% of all plan assets available for distribution were preserved and only 8% were taken in cash.


Equity allocations continue to vary dramatically among participants. One in 5 participants has taken an extreme position, holding either 100% in equities (13% of participants) or no equities (9% of participants).

Participant contributions to equities also declined from 74% in 2007 to 70% in 2010. New participants enrolling in 2008 and 2009 tended to adopt more conservative equity allocations. This was somewhat offset by the rising use of target-date funds by new participants. New participants enrolling in 2010 invested 54% of contributions to target-date funds.

Participant trading muted

In 2010, participants’ trading activity was at the lowest level observed since we began tracking this data in 1999 in How America Saves. During 2010, only 12% of DC plan participants traded in their accounts, while 88% did not. This measure of trading by plan participants declined by a quarter compared with 2008, when 16% of plan participants traded. On a net basis, traders shifted 1.1% of assets to fixed income in 2010, with most traders making small changes to their portfolios. Only 1% of all participants actually abandoned equities during the year—that is, shifted from a portfolio with some equity exposure to an all-fixed income portfolio. Overall, trading levels remain low. The majority of participants make no trades in a given year—not even to rebalance their account to a target asset allocation.

Fall in company stock exposure

A shift away from company stock holdings first observed in 2006 continued into 2010. Among plans offering company stock, the number of participants holding a concentrated position of more than 20% of their account balance fell from 42% in 2005 to 31% in 2010. Possible reasons for this change include: continued fiduciary litigation surrounding company stock exposure; plan sponsor easing of company stock restrictions in response to the diversification rules

The U.S. equity market, as represented by the S&P 500 Index closing value, rose 25% from 2005 through October 2007, when stock prices reached an historic peak (Figure 1). As the mortgage and financial system crisis unfolded in the United States, stock prices then fell 57% through March 2009. From the March 2009 lows, the U.S. market subsequently rebounded 86% through year-end 2010, reaching the same level as year-end 2005. As of year-end 2010, the S&P 500 Index remained 20% below its October 2007 peak.1

During this period, the National Bureau of Economic Research (NBER) reported that a severe recession had begun in December 2007 as a result of the mortgage and financial system crisis, just a few months after the stock market peak. The NBER subsequently

reported that the U.S. recession officially ended in July 2009, several months after the market trough. The unemployment rate was 4.9% in December 2005, peaked at 10.1% in October 2009, and was at 9.4% in December 2010.

Stock prices were exceptionally volatile during the economic downturn and the period of financial system instability. Historically, 1% of stock market trading days are associated with a change in stock prices of greater than +/– 3%. In 2008, 16.8% of trading days were characterized by this level of volatility; in 2009 it was 8.9% of trading days. In 2010, only 3.2% of trading days had a volatility level of greater than +/– 3%. While stock market volatility moderated somewhat in 2010, it remains higher than in 2005–2006.

1 These changes reflect only the price index level; the total return of buy-and-hold stock market investors would also have included reinvested dividends.


Market overview

S&P 500 daily closeFigure 1.

500

1700

Recessionary period

Source: S&P 500.Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Dec.2009

Dec.2008

Dec.2007

Dec.2006

Dec.2005

Dec.2010


Figure 2. Highlights at a glance

Plan design 2006 2007 2008 2009 2010

Percentage of plans offering immediate eligibility for employee contributions 44% 51% 53% 52% 52%Percentage of plans requiring one year of service for matching contributions 33% 34% 29% 23% 25%Percentage of plans providing an employer contribution 91% 95% 94% 92% 85%Percentage of plans with automatic enrollment 10% 15% 19% 21% 24%Percentage of plans offering Roth contributions 12% 24% 31% 37% 42%Percentage of plans offering catch-up contributions 90% 91% 92% 95% 96%Percentage of plans offering after-tax contributions 20% 20% 20% 19% 19%

Participation ratesPlan-weighted participation rate 75% 76% 77% 76% 74%Participant-weighted participation rate 66% 68% 73% 73% 68%Percentage of participants using Roth (where offered) 5% 6% 7% 7% 9%Percentage of participants using catch-up contributions (where offered) 14% 12% 13% 12% 13%Percentage of participants using after-tax (where offered) 9% 9% 9% 8% 7%

Contribution ratesAverage participant deferral rate 7.3% 7.3% 7.0% 6.8% 6.8%Median participant deferral rate 6.0% 6.0% 6.0% 6.0% 6.0%Percentage of participants deferring more than 10% 24% 23% 22% 21% 21%Percentage of participants reaching 402(g) limit ($16,500 in 2010) 10% 10% 10% 9% 9%Average total contribution rate (participant and employer) 10.9% 10.7% 10.6% 9.8% 9.7%Median total contribution rate (participant and employer) 10.0% 10.0% 9.8% 9.0% 8.8%

Account balancesAverage balance (typical of participants at about the 75th percentile) $75,791 $78,411 $56,030 $69,084 $79,077Median balance $25,953 $25,196 $17,399 $23,140 $26,926

AllocationAverage plan asset allocation to equities 73% 73% 61% 66% 68%Average plan contribution allocation to equities 72% 74% 73% 68% 70%Percentage of participants with extreme asset allocations (100% fixed income or equity) 32% 28% 27% 25% 22%

Plan investment optionsAverage number of funds offered target-date and target-risk counted as one option 16.9 17.6 17.9 18.3 18.6Average number of funds used 3.6 3.6 3.4 3.4 3.3Percentage of plans actively offering company stock 11% 11% 11% 11% 11%Percentage of all participants using company stock 25% 22% 22% 21% 20%Percentage of participants with more than 20% of their account in company stock 14% 12% 11% 11% 10%Percentage of plans offering target-date funds 43% 58% 68% 75% 79%Percentage of all participants using target-date funds 10% 18% 28% 34% 42%Percentage of all participants with professionally managed allocations 12% 17% 22% 25% 29%Percentage of plans offering an index core 31% 33% 36% 38% 40%Percentage of participants trading 14% 15% 16% 13% 12%

LoansPercentage of plans offering loans 74% 75% 74% 75% 75%Percentage of participants with an outstanding loan (where loans are offered) 17% 16% 16% 16% 18%Percentage of total recordkeeping assets borrowed 2% 2% 2% 2% 2%

WithdrawalsPercentage of plans offering withdrawals 79% 80% 80% 81% 81%Percentage of participants using withdrawals (where withdrawals are offered) 3% 3% 3% 3% 4%Percentage of total recordkeeping assets withdrawn 1% 1% 1% 1% 1%Percentage of participant account balance withdrawn 28% 30% 33% 33% 30%

Plan distributions and rolloversPercentage of terminated participants preserving assets 71% 71% 69% 69% 70%Percentage of assets preserved that were available for distribution 92% 93% 92% 92% 92%

Participant access methodsPercentage of participants not contacting Vanguard during the year 46% 44% 43% 47% 47%Percentage of participants registered for internet account access 49% 58% 59% 62% 64%Percentage of participant account transactions processed via the internet 69% 69% 72% 76% 80%

Source: Vanguard, 2011.


DC plans are the dominant type of retirement plan sponsored by private-sector employers in the United States, covering nearly half of all private-sector workers. Although there is still a significant minority of individuals eligible for such plans who fail to participate in them, DC plans have nonetheless enabled millions of American workers to accumulate savings for retirement.

The performance of DC plans can be measured in several ways:

Accumulating plan assets. The level of plan contributions is fundamental to retirement savings adequacy. Plan contributions are affected by employee participation rates, participant deferral rates, and the value of employer contributions. Participant deferral behavior is increasingly influenced by employers’ automatic enrollment default designations. Overall retirement plan design varies substantially across employers—and variation in the level of employer contributions does impact the employee contributions needed to accumulate sufficient retirement savings.

Managing participant accounts. After deciding to contribute to a retirement savings plan, participants’ most important decision is how to allocate their

holdings among the major asset classes. As with deferral decisions, many such investment decisions are increasingly influenced by employer-established defaults. These investment decisions—including the types of investment options offered by the plan and the choices participants or employers make from among those options—have a direct impact on account performance over time. Thus, investment choices, in conjunction with the level of plan contributions, ultimately influence participants’ level of retirement readiness.

Accessing plan assets. Participants may be able to take a loan or in-service withdrawal to access their savings while working. When changing jobs or retiring, they typically have the option of remaining in the plan, rolling over to another plan or IRA, or taking a cash lump sum.

Our analysis shows that, despite a quite volatile market and economic environment in recent years, most Vanguard DC plan participants have seen their retirement savings grow over three- and five-year periods. Meanwhile, most metrics of participant behavior have returned to prerecession levels in 2010.

DC retirement plans

1 Accumulating plan assets

Historically employees have had to decide whether to participate and at what rate to save. Increasingly employers are making these decisions through automatic enrollment.

Plan design

Nine in 10 Vanguard-administered DC plans permit pre-tax elective deferrals by eligible employees. Employee deferral decisions are shaped by the design of the DC plan sponsored by their employer.

DC plans with employee-elective deferrals can be grouped into four categories based on the type of employer contributions made to the plan: (1) plans with matching contributions, (2) plans with nonmatching employer contributions, (3) plans with both matching and nonmatching contributions, and finally, (4) plans with no employer contribution at all. Nonmatching contributions are typically structured as a variable or fixed profit-sharing contribution, or less frequently as an employee stock ownership plan (ESOP) contribution.

In employee-contributory DC plans, employer contributions are typically a secondary source of plan funding. Both the type and size of employer contributions vary substantially across plans.

EligibilityIn 2010, more than half (52%) of Vanguard plans allowed employees to make voluntary contributions immediately after they joined their employer (Figure 3). Larger plans were more likely to offer immediate eligibility than smaller plans were; as a result, 56% of employees qualified for immediate eligibility in 2010.

At the other extreme, 15% of plan sponsors required eligible employees to have one year of service before they could make employee-elective contributions to their plan. Smaller plans were more likely to impose the one-year wait; as a result, only 11% of total eligible employees were subject to this restriction.

Eligibility rules are more restrictive for employer contributions, including matching contributions and other types of employer contributions, such as profit-sharing or ESOP contributions. A one-year eligibility rule is much more common for employer contributions, presumably because employers want to minimize compensation costs for short-tenured employees.

12 > Accumulating plan assets

45%

3%

11% 9%

32%

56%

9% 11%

4%

20%

43%

7%

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25%

42%

23%

7% 3%

25%

52%

8%

16%

9%

15%

56%

21%

8% 4%

11%

Eligibility, 2010

Vanguard defined contribution plans permitting employee-elective deferrals

Elective-employee contributions

Figure 3.

0

70%

Immediate 1 month 2–3months

4–6months

1 year


4–6months

1 year


4–6months

1 year

Employer-matching contributions

Other employer contributions

0

70%


Percentage of plans Percentage of employees

0

70%

VestingIn 2010, almost half of plans (46%) immediately vested participants in employer-matching contributions (Figure 4). Large plans are slightly more likely to offer immediate vesting and just more than half (51%) of participants are in plans with immediate vesting of employer-matching contributions. Smaller plans are more likely to use longer vesting schedules. About one-third of plans with employer-matching contributions use a 5- or 6-year graded vesting schedule. One in 5 participants with employer-matching contributions is in a plan with a longer vesting schedule.

In 2010, 4 in 10 plans immediately vested participants for other employer contributions, such as profit-sharing or ESOP contributions. Large plans are more likely to immediately vest participants for other employer contributions and 45% of participants with other employer contributions receive immediate vesting. On the other hand, 4 in 10 plans with other employer contributions use a 5- or 6-year graded vesting schedule and one-quarter of participants receiving other employer contributions are in plans with longer vesting schedules.

Accumulating plan assets > 13

39%

1% 2%

14%

1% 2% 2%

15%

24%

45%

0% 4%

22%

0% 1% 2%

18%

8%

46%

2% 4%

11%

1% 3% 2%

17% 14%

51%

9% 4%

10%

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15%

4%

Vesting, 2010

Vanguard defined contribution plans with employer contributions

Figure 4.

0

70%


Immediate 1-year cliff 2-year cliff 3-year cliff 2-yeargraded

3-yeargraded

4-yeargraded

5-yeargraded

6-yeargraded

Percentage of plans Percentage of participants

Employer-matching contributions

0

70%

Immediate 1-year cliff 2-year cliff 3-year cliff 2-yeargraded

3-yeargraded

4-yeargraded

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6-yeargraded


Employer contributions

Four in 10 Vanguard plans provided only a matching contribution in 2010, and this type of design covered 56% of participants (Figure 5). One-third of plans, covering 37% of participants, provided both a matching and a nonmatching employer contribution. Eight percent of plans provided only a nonmatching employer contribution, and 2% of participants were in this type of design. Finally, 15% of plans made no employer contributions of any kind in 2010, and 5% of participants were in this category.

As noted previously, eligibility for employer contributions is typically more restrictive than eligibility for employee-elective deferrals. In 2010, a higher proportion of plans imposed a one-year waiting period on employer contributions, whether in the form of a matching or other type of contribution, than imposed a one-year waiting period on employee-elective deferrals.

These statistics summarize the incidence of employer contributions to a DC plan that accepts employee deferrals. They do not necessarily reflect the entire retirement benefits program funded by certain employers. Some employers may offer a companion employer-funded plan—such as a defined benefit (DB) plan, or a stand-alone profit-sharing, ESOP, or money purchase DC plan—in addition to an employee-contributory DC plan.

Matching contributionsThe wide variation in employer contributions is most evident in the design of employer-matching formulas. In 2010, Vanguard administered more than 200 distinct match formulas for plans offering an employer match. Among plans offering a matching contribution in 2010, three-quarters (covering 60% of participants) provided a single-tier match formula, such as $0.50 on the dollar on the first 6% of pay (Figure 6). Less common, used by 15% of plans (covering one-third of participants), were multitier match formulas, such as $1 per dollar on the first 3% of pay and $0.50 per dollar on the next 2% of pay.

Another 7% of plans (covering 4% of participants) had a single- or multitier formula, but imposed a maximum dollar cap on the employer contribution, such as $2,000. Finally, a very small percentage of plans used a match formula that varied by age, tenure, or other variables.

The matching formula most commonly cited as a typical employer match is $0.50 on the dollar on the first 6% of pay. This is the match most commonly offered among Vanguard DC plans and most commonly received by Vanguard DC plan participants.


Figure 5. Types of employer contributions, 2010


Type of employer Percentage Percentage contribution of plans of participants

Matching contribution only 42% 56%

Nonmatching contribution only 8 2

Both matching and other nonmatching contribution 35 37

Subtotal 85% 95%

No employer contribution 15% 5%


Figure 6. Types of matching contributions, 2010

Vanguard defined contribution plans with matching contributions

Percentage Percentage Match type Example of plans of participants

Single-tier formula $0.50 per dollar on 6% of pay 77% 60%

Multitier formula $1.00 per dollar on first 3% of pay; $0.50 per dollar on next 2% of pay 15 35

Dollar cap Single- or multitier formula with $2,000 maximum 7 4

Other Variable formulas based on age, tenure, or similar variables 1 1


In fact, among plans offering a match, 26% provided exactly this match formula in 2010, covering 16% of participants.

Given the multiplicity of match formulas, one way to summarize matching contributions is to calculate the maximum value of the match promised by the employer. For example, a match of $0.50 on the dollar on the first 6% of pay promises the same matching contribution—3% of pay—as a formula of $1 per dollar on the first 3% of pay.

The promised value of the match varies substantially from plan to plan. Among plans with single- or multitier match formulas, two-thirds (covering two-thirds of participants) promised a match of between 3% and 6% of pay (Figure 7). Most promised matches ranged from 1% to 6% of pay. The average value of the promised match was 3.9% of pay; the median value, 3.0%. Average and median promised matches have remained fairly stable between 2005 and 2010 (Figure 8).


1%

12% 10%

37%

19%

7% 8% 6%

0%

42%

5%

24%

14%

4%

9%

2%

Distribution of promised matching contributions, 2010

Vanguard defined contribution plans permitting employee-elective deferrals with a single- or multitier match formula

Figure 7.



0

45%

0.00%to 0.99%

1.00%to 1.99%

2.00%to 2.99%

3.00%to 3.99%

Maximum value of match (percentage of pay)

Average (median) value of promised match: 3.9% (3.0%)

4.00%to 4.99%

5.00%to 5.99%

6.00%to 6.99%

7.00%+

4.1% 4.2% 4.2% 4.0% 3.9% 3.9%

3.0% 3.0% 3.0% 3.5% 3.5%

3.0%

Promised matching contributions


Figure 8.

0

10%


Average Median

2005 2006 2007 2008 2009 2010

Another way to assess matching formulas is to calculate the employee-elective deferral needed to realize the maximum value of the match. In 2010, 8 in 10 plans (covering 8 in 10 participants) required participants to defer between 4% and 7% of their pay to receive the maximum employer-matching contribution (Figure 9). The average employee-elective deferral required to maximize the match was 7.3% of pay; the median value, 6.0%. The average employee-elective deferral required to maximize the match declined slightly between 2005 and 2010; however, the median deferral required remained constant at 6.0% (Figure 10).

Other employer contributionsAs noted previously, in a minority of plan designs, employers may make another contribution to the accounts of eligible employees in the form of a variable or fixed profit-sharing contribution or an ESOP contribution. These contributions, unlike matching contributions, may be made on behalf


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Employee contributions for maximum match, 2010


Figure 9.



0

70%

1.00%to 1.99%

2.00%to 2.99%

3.00%to 3.99%

Employee contribution for maximum match (percentage of pay)

Average (median) value of employee contribution to maximize employer match: 7.3% (6.0%)

4.00%to 4.99%

5.00%to 5.99%

6.00%to 6.99%

7.00%to 7.99%

8.00%to 8.99%

9.00%to 9.99%

10.00%+

7.8% 7.8% 8.0% 7.3% 7.1% 7.3%

6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Employee contributions for maximum match


Figure 10.

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10%


Average Median

2005 2006 2007 2008 2009 2010

of eligible employees whether or not they actually contribute any part of their pay to the plan. As with matching contributions, eligibility is more restrictive for these types of employer contributions—many employees are not entitled to receive these contributions until they complete one year of service.

The value of other employer contributions also varies significantly from plan to plan. Among plans offering such contributions in 2010, half provided all participants with a contribution based on the same percentage of pay, while the other half varied the contribution by age and/or tenure. These nonmatching contributions varied in value from about 1% of pay to more than 10% of pay (Figure 11). Among plans with a nonmatching employer contribution, the average contribution was equivalent to 4.5% of pay; the median contribution, 4.0% of pay.

Between 2007 and 2009, the average value of other employer contributions was about 20% lower than in 2005 and 2006. In 2010, the average value of other employer contributions rebounded to prerecession levels (Figure 12).


4.7% 4.5% 3.9% 3.7% 3.9%

4.5% 4.0%

3.4% 3.0% 3.0% 3.0%

4.0%


Vanguard defined contribution plans with other employer contributions

Figure 12.

0

10%


Average Median

2005 2006 2007 2008 2009 2010

6%

14% 14% 13%

11%

15%

8%

4%

1% 3%

11%

3%

14%

24%

10% 9%

22%

5%

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6%

Other employer contributions, 2010

Vanguard defined contribution plans with other employer contributions

Figure 11.



0

30%

0.00%to 0.99%

1.00%to 1.99%

2.00%to 2.99%

3.00%to 3.99%

Value of other employer contribution (percentage of pay)

Average (median) value of otheremployer contribution: 4.5% (4.0%)

4.00%to 4.99%

5.00%to 5.99%

6.00%to 6.99%

7.00%to 7.99%

8.00%to 8.99%

9.00%to 9.99%

10.00%+

Maximum employee contribution limitMany plans have incorporated expanded contribution limits authorized in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Eighty-two percent of DC plans (covering 89% of participants) have raised to 50% or more the maximum percentage of pay that employees can contribute to their plans (Figure 13).

Automatic enrollment designs

In a typical 401(k) or 403(b) plan, employees must make an active choice to join the plan. The enrollment decision is framed as a positive election: “Decide if you’d like to join.” Why do employees fail to take advantage of their employers’ plans? Research in the field of behavioral finance provides a number of explanations:

• Lack of planning skills. Some employees are not active, motivated decision-makers when it comes to retirement and financial planning. They lack the skill to plan effectively for the future and find it difficult to defer gratification and pursue long-term goals.


5%

10%

15%

19% 21%

24%

Automatic enrollment adoption


Figure 14.

0

30%


2005 2006 2007 2008 2009 2010

0% 4%

10%

2% 2%

34%

3%

10%

3%

32%

0% 1%

8%

2% 1%

49%

3%

23%

1%

12%

Maximum pre-tax contribution limit, 2010


Figure 13.



0

70%

80%–89%<10% 10%–19% 20%–29% 30%–39% 40%–49% 50%–59% 60%–69% 70%–79% 90%+


Figure 15. Automatic enrollment design by plan size, 2010

Vanguard defined contribution plans with automatic enrollment

Number of participants

All < 1,000 1,000–4,999 5,000+

Percentage of plans with employee-elective contributions offering 24% 16% 48% 45%

Percentage of participants in plans offering 47 27 51 49

For plans offering automatic enrollment

Percentage of plans with automatic enrollment, automatic savings rate increases, and a balanced default fund 75% 78 74% 67%

Percentage of plans with automatic enrollment and a balanced default fund 24 20 26 33

Percentage of plans with automatic enrollment, automatic savings rate increases, and a money market or stable value default fund 1 1 0 0

Percentage of plans with automatic enrollment and a money market or stable value default fund 0 1 0 0


• Default decisions. Faced with a complex choice and unsure what to do, many individuals often take the default or “no decision” choice. In the case of a voluntary savings plan, which requires that a participant take action in order to sign up, the “no decision” choice is a decision not to save.

• Inertia and procrastination. Many individuals deal with a difficult choice by deferring it to another day. Eligible nonparticipants, unsure of what to do, decide to postpone their decision. While many employees know they are not saving enough and express an interest in saving more, they simply never get around to joining the plan or, if they join, to increasing their contribution rates.

Automatic enrollment or autopilot designs reframe the savings decision. With an autopilot design, individuals are automatically enrolled into the plan, their deferral rates are automatically increased each year, and their contributions are automatically invested in

a balanced fund. Under an autopilot plan, the decision to save is framed negatively: “Quit if you like.” In such a design, “doing nothing” leads to participation in the plan and investment of assets in a long-term retirement portfolio.

As of December 2010, one-quarter of Vanguard plans permitting employee-elective deferrals had adopted components of an autopilot design (Figure 14). Large plans are more likely to implement automatic enrollment, with more than 45% of midsized and large plans using the feature. As a result, almost half of all participants are now in plans with autopilot designs, although automatic enrollment itself typically only applies to newly eligible participants (Figure 15). Adoption of automatic enrollment designs grew only modestly in 2010, and by the end of 2010 almost half of large plans had added the feature. It remains to be seen when the economy improves whether or not adoption of automatic enrollment will grow rapidly again.

Among plans automatically enrolling employees, 75% use all three features of an autopilot design. These plan sponsors automatically enroll employees, automatically increase the deferral rate annually, and invest participants’ assets in a balanced fund. Another 24% of plan sponsors automatically enroll employees and invest participants’ assets in a balanced fund, but do not automatically increase participant deferral rates.

Fifty-eight percent of these plans automatically enroll participants at a 3% contribution rate (Figure 16). Three-quarters of the plans automatically increase the contribution rate annually. Ninety-nine percent

of these plans use a target-date or other balanced fund as the default fund, with 9 in 10 choosing a target-date fund as the default.

We previously analyzed the adequacy of total contribution rates in automatic enrollment plans.2 In our sample, 4 in 10 plan sponsors had implemented designs with inadequate total contribution rates. These plans had designs in which, after five years, total plan contributions—including employee-elective deferrals and all employer contributions—were less than 9%. A related concern is that most of these plans apply automatic enrollment only to new hires and leave existing eligible nonparticipants and low savers untouched.

2 Utkus, Stephen P. and Jean A. Young, 2007, Measuring the effectiveness of automatic enrollment, Vanguard Center for Retirement Research, institutional.vanguard.com.


Figure 16. Automatic enrollment design trends

Vanguard defined contribution plans with automatic enrollment

Default automatic enrollment rate 2005 2006 2007 2008 2009 2010

1 percent 4% 3% 3% 2% 2% 2%

2 percent 23 20 17 13 14 13

3 percent 46 52 56 60 57 58

4 percent 12 10 10 10 10 10

5 percent 10 8 7 7 7 6

6 percent or more 5 7 7 8 10 11

Default automatic increase rate

1 percent 31% 57% 66% 75% 74% 74%

2 percent 0 2 2 2 1 1

Voluntary election 44 27 23 16 17 20

Service feature not offered 25 14 9 7 8 5

Default fund

Target-date fund 42% 63% 81% 87% 90% 92%

Other balanced fund 33 26 15 11 9 7

Subtotal 75% 89% 96% 98% 99% 99%

Money market or stable value fund 25% 11% 4% 2% 1% 1%


Participation rates

A plan’s participation rate—the percentage of eligible employees who choose to make voluntary contributions—remains the broadest metric for gauging 401(k) plan performance. The most common measure of participation rates is calculated by taking the average of participation rates among a group of plans. We refer to this as the plan-weighted participation rate. In 2010, Vanguard’s plan-weighted participation rate was 74% and has remained basically unchanged since 2001 (Figure 17).

A second measure of participation rates considers all employees in Vanguard-administered plans as if they were in a single plan. We refer to this as the participant-weighted participation rate. Across the universe of Vanguard participants, 68% of eligible employees are enrolled in their employer’s voluntary

savings program. This broader measure of plan participation has begun a modest rise in recent years. This increase likely reflects the adoption of automatic enrollment by larger plan sponsors, predominantly for new hires.

These two measures provide different views of employee participation in their retirement savings plans. The first measure indicates that, in the average plan, about one-quarter of eligible employees fail to contribute. The second measure, however, shows that within the entire employee universe, about 3 in 10 employees fail to take advantage of their employer’s plan. The first measure is a useful benchmark for an individual plan sponsor because it is calculated at the plan level; the second is a valuable measure of the progress of 401(k) plans as a whole because it looks at all eligible employees across all plans.


76% 75% 74% 74% 74% 74% 75% 76% 77% 76%

65% 66% 65% 65% 65% 66% 68% 73% 73%

68%

Participation rates


Figure 17.

0

100%

Plan-weighted Participant-weighted

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Note: The 2010 participation rates are drawn from a subset of plans that had completed nondiscrimination testing by March 2011 and represents approximately half of the clients for whom we perform testing. When testing has been completed for all plans, the analysis is performed again and the data is restated for prior years. Plans that complete testing by March generally have lower participation rates and include plans with concerns related to passing nondiscrimination testing. The previously reported plan- and participant-weighted participation rates for 2009 were 75% and 69%. Source: Vanguard, 2011.


Distribution of participation ratesParticipation rates vary considerably across plans (Figure 18). In 2010, half of plans had a participation rate of 80% or higher, while 1 in 10 had a participation rate of less than 50%.

Participation rates also vary by plan size, with larger plans having lower participation rates than other plans (Figure 19). One reason for lower participation rates at large companies may be the presence of another retirement plan benefit, such as an employer-funded

DB plan, or employer profit-sharing or ESOP contributions to a DC plan. Other possible reasons include the inherent difficulty of communicating across many locations in a large firm and the fact that large firms often outsource the enrollment process to their provider, while small firms may tend to rely on an in-house human resources representative. Larger plans have been most likely to add automatic enrollment; however, it has typically been added only for new employees, leaving existing nonparticipants unaffected.

Figure 18. Distribution of participation rates


Percentage of plans

Plan participation rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

90%–100% 20% 15% 15% 15% 16% 17% 20% 24% 23% 18%

80%–89% 27 29 27 28 26 28 31 30 29 32

70%–79% 24 26 25 24 25 23 20 20 20 18

60%–69% 13 15 15 15 15 16 14 11 11 12

50%–59% 8 7 9 9 9 8 8 8 7 8

<50% 8 8 9 9 9 8 7 7 10 12

Average plan participation rate 76 75 74 74 74 75 76 77 76 74


Figure 19. Participation rates by plan size



Plan-weighted participation rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

<1,000 77% 76% 75% 75% 75% 75% 76% 77% 75% 74%

1,000–4,999 72 71 70 71 71 73 75 78 79 76

5,000+ 71 71 72 70 69 71 73 78 76 69

All plans unweighted 76 75 74 74 74 75 76 77 76 74

Participant-weighted participation rate

<1,000 70% 70% 69% 69% 68% 68% 72% 74% 71% 70%

1,000–4,999 65 66 64 66 64 66 67 71 72 66

5,000+ 62 64 64 63 64 65 67 74 73 68

All plans weighted 65 66 65 65 65 66 68 73 73 68


Participation rates by employee demographicsParticipation rates also vary considerably by employee demographics (Figure 20). Income is one of the primary determinants of plan participation rates. Only half of eligible employees with incomes of less than $30,000 contributed to their employer’s DC plan in 2010, while 88% of employees with incomes of more than $100,000 elected to participate. Yet even among the highest-paid employees, 12% of eligible workers still failed to take advantage of their employer’s DC plan.

Participation rates were lowest for employees younger than 25. Only 41% of employees younger than 25 made voluntary deferrals to their employer’s plan in 2010, while about 7 in 10 eligible employees between ages 35 and 64 saved for retirement in their employer’s plan. Tenure had a significant influence on plan participation. In 2010, only 49% of eligible employees with less than two years on the job participated in their employer’s plan, while 78% of employees with ten years or more of tenure participated.


Figure 20. Participation rates by participant demographics


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

All 65% 66% 65% 65% 65% 66% 68% 73% 73% 68%

Income

<$30,000 42% 44% 41% 41% 43% 43% 45% 56% 55% 50%

$30,000–$49,999 67 66 66 63 64 63 66 71 70 65

$50,000–$74,999 80 79 77 75 75 74 76 78 76 71

$75,000–$99,999 87 87 85 83 83 84 84 85 84 80

$100,000+ 90 91 90 90 90 91 91 91 90 88

Age

<25 31% 30% 27% 28% 30% 33% 38% 49% 49% 41%

25–34 60 60 58 58 57 58 61 68 68 61

35–44 73 72 70 69 68 69 70 75 74 69

45–54 75 75 73 72 71 71 74 78 77 73

55–64 75 74 74 71 71 72 74 77 76 73

65+ 60 58 62 58 58 57 62 67 68 67

Gender

Male 66% 67% 65% 64% 65% 66% 69% 75% 73% 67%

Female 64 64 64 62 64 64 67 73 72 68

Job tenure (years)

0–1 46% 39% 37% 41% 42% 45% 49% 58% 55% 49%

2–3 65 65 59 56 56 58 61 69 69 58

4–6 75 74 70 68 66 67 68 73 72 67

7–9 78 78 77 75 73 73 74 79 77 72

10+ 79 78 79 77 77 79 80 82 81 78


Men and women appear to participate at about the same level. But these overall averages fail to account for the income differences between men and women. At most income levels, women are significantly more likely than men to join their employer’s plan (Figure 21). For example, in 2010, 78% of women earning $50,000 to $74,999 participated in their employer’s plan—compared with 68% of men in the same income group.

Participation rates also vary by industry group (Figure 22). Employees in the agriculture, mining, and construction industry group had the highest participation rate, with 9 in 10 workers participating in their employer’s plan, while employees in the wholesale and retail trade industry had the lowest participation rate, at 46%.

Impact of automatic enrollment on plan participationReflecting increased adoption of automatic enrollment designs, there was dramatic improvement in participation rates between 2005 and 2010 among demographic groups that traditionally have lower voluntary participation rates. Employees in plans with an automatic enrollment feature at the end of 2010 have an overall participation rate of 82% compared with a participation rate of only 57% for employees in plans with voluntary enrollment (Figure 23). This is especially remarkable in light of the fact that most plan sponsors have implemented automatic enrollment prospectively for new hires only.


Figure 21. Participation by income and gender, 2010


Female Male All

<$30,000 49% 51% 50%

$30,000–$49,999 69 61 65

$50,000–$74,999 78 68 71

$75,000–$99,999 84 78 72

$100,000+ 86 88 88


Figure 22. Participation rates by industry sector, 2010


Plan- Participant- weighted weighted

Overall 74% 68%

Industry group

Agriculture, mining, and construction 77% 89%

Finance, insurance, and real estate 81 79

Manufacturing 73 75

Transportation, utilities, and communications 74 70

Business, professional, and nonprofit 76 63

Media, entertainment, and leisure 67 63

Education and health 78 59

Wholesale and retail trade 68 46



81% 82% 83% 84% 83% 80%

70% 72% 74% 78% 79%

71%

Aggregate participation rates

Vanguard defined contribution plans permittingemployee-elective deferrals

Figure 24.

0

100%


Plan-weighted Participant-weighted

2005 2006 2007 2008 2009 2010

Figure 23. Participation rates by plan design, 2010


Voluntary Automatic enrollment enrollment All

All 57% 82% 68%

Income

<$30,000 26% 76% 50%

$30,000–$49,999 52 79 65

$50,000–$74,999 60 86 71

$75,000–$99,999 73 89 80

$100,000+ 85 93 88

Age

<25 18% 72% 41%

25–34 47 81 61

35–44 58 82 69

45–54 64 84 73

55–64 66 84 73

65+ 60 80 67

Gender

Male 54% 83% 67%

Female 58 82 68

Job tenure (years)

0–1 29% 75% 49%

2–3 44 81 58

4–6 57 82 67

7–9 66 82 72

10+ 71 85 78


Plans with automatic enrollment have higher participation rates across all demographic variables. For individuals earning less than $30,000, the participation rate is about triple that of plans with voluntary enrollment.

Aggregate plan participation ratesAs noted previously, some plan sponsors make other nonmatching contributions for all eligible employees, whether or not these employees actually defer any part of their pay to the plan. When these contributions are factored in, both the plan- and participant-weighted participation rates improve. The plan-weighted participation rate rises to 80% and the participant-weighted rate to 71% (Figure 24). In other words, across all Vanguard plans, nearly three-quarters of employees either make their own contributions, receive an employer contribution, or both.

Employee deferrals

In a typical DC plan, employees are the main source of funding, while employer contributions play a secondary role. Thus the level of participant deferrals is a critical determinant of whether the DC plan will generate an adequate level of savings in retirement.

Vanguard participants saved 6.8% of their income in their employer’s plan in 2010 (Figure 25). The median participant deferral rate was 6.0%, meaning that half of participants were saving above this rate and half were saving below it.

Vanguard deferral rates are drawn from recordkeeping data and exclude eligible employees not contributing to their plans. Industry deferral rates sometimes include eligible employees not contributing to their plan and are generally self-reported by plan sponsors.

Median deferral rates are essentially unchanged since 2000. However, average deferral rates declined slightly in 2009 and 2010. Since 2007, the average deferral rate has declined by 0.5 percentage points. This slight decline is attributable to the growth in automatic enrollment, where the dominant default

deferral rate is 3%, and to the recent economic cycle. We estimate that half of this decline is attributable to the growth in automatic enrollment, and half to the recent economic cycle.

Distribution of deferral ratesIndividual deferral rates vary considerably among participants (Figure 26). One in 5 participants had a deferral rate of 10% or higher in 2010, while 3 in 10 had a deferral rate of less than 4%. During 2010, only 9% of participants saved the statutory maximum of $16,500 ($22,000 for participants age 50 or older). In plans offering catch-up contributions, only 13% of participants age 50 or older took advantage of this feature in 2010.

Plan size has little effect on participant deferral rates (Figure 27). In 2010, plans with 5,000 or more participants had an average deferral rate of 6.8%— the same as the overall average rate of 6.8%. Employees at large firms typically have more generous compensation packages and so arguably should have a higher propensity to save than employees at small companies. But the presence of automatic enrollment and other employer-funded retirement benefits as part of that package may dilute this effect.


7.2% 7.2% 7.2% 7.3% 7.2% 7.3% 7.3% 7.0% 6.8% 6.8%

6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Deferral rates


Figure 25.

0

8%

Average Median


2001 201020092008200720062004 20052002 2003


Figure 27. Deferral rates by plan size


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average—all plans 7.2% 7.2% 7.2% 7.3% 7.2% 7.3% 7.3% 7.0% 6.8% 6.8%

Median 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

Average by plan size (number of participants)

<1,000 7.0% 7.1% 7.2% 7.2% 7.2% 7.2% 7.3% 7.1% 6.9% 6.9%

1,000–4,999 6.9 7.0 7.1 7.2 7.3 7.2 7.2 7.0 6.8 6.8

5,000+ 7.5 7.5 7.4 7.5 7.2 7.4 7.4 6.9 6.7 6.8


Figure 26. Distribution of deferral rates


Percentage of participants

Deferral rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.1%–3.9% 20% 23% 24% 24% 26% 26% 27% 30% 32% 30%

4.0%–6.0% 30 26 25 25 25 24 23 22 22 25

6.1%–9.9% 26 28 27 27 26 26 27 26 25 24

10.0%–14.9% 18 17 17 17 16 16 15 15 14 14

15.0%+ 6 6 7 7 7 8 8 7 7 7



Figure 28. Deferral rates by participant demographics


Average deferral rate 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

All 7.2% 7.2% 7.2% 7.3% 7.2% 7.3% 7.3% 7.0% 6.8% 6.8%

Income

<$30,000 5.9% 6.0% 6.2% 6.4% 6.0% 6.0% 5.7% 4.8% 4.7% 4.8%

$30,000–$49,999 6.9 6.8 6.6 6.6 6.4 6.3 6.2 5.9 5.6 5.8

$50,000–$74,999 8.1 8.0 7.9 7.8 7.7 7.7 7.6 7.4 7.0 7.0

$75,000–$99,999 8.1 8.2 8.5 8.6 8.7 8.9 8.9 8.6 8.4 8.3

$100,000+ 6.7 6.7 7.0 7.3 7.6 8.1 8.5 8.1 8.2 8.3

Age

<25 5.2% 5.2% 5.0% 5.0% 4.7% 4.6% 4.5% 4.1% 4.0% 3.9%

25–34 6.4 6.4 6.2 6.5 6.0 5.9 5.9 5.6 5.5 5.4

35–44 6.8 6.8 6.8 6.8 6.7 6.8 6.7 6.4 6.2 6.2

45–54 7.4 7.4 7.5 7.6 7.6 7.8 7.8 7.5 7.2 7.2

55–64 8.4 8.5 8.7 8.9 9.0 9.1 9.2 8.9 8.5 8.6

65+ 9.0 9.4 9.9 10.2 10.4 10.7 10.8 10.4 9.8 10.1

Gender

Male 7.1% 7.1% 7.2% 7.2% 7.2% 7.3% 7.3% 7.0% 6.7% 6.7%

Female 7.3 7.3 7.3 7.4 7.3 7.3 7.2 6.9 6.8 6.9

Job tenure (years)

0–1 6.1% 6.2% 6.0% 6.0% 5.9% 5.7% 5.6% 5.0% 4.9% 4.4%

2–3 6.8 6.8 6.8 6.8 6.6 6.6 6.7 6.3 6.1 6.0

4–6 7.0 7.1 7.0 7.1 7.0 7.1 7.1 6.8 6.5 6.5

7–9 7.1 7.1 7.1 7.2 7.2 7.4 7.4 7.1 6.9 7.0

10+ 7.6 7.6 7.6 7.8 7.9 8.1 8.2 8.0 7.7 7.7

Account balance

<$10,000 5.0% 4.9% 4.5% 4.5% 4.4% 4.2% 4.1% 4.1% 3.6% 3.7%

$10,000–$24,999 7.3 7.4 6.5 6.3 6.3 6.4 6.5 6.8 5.8 5.7

$25,000–$49,999 8.0 8.2 7.9 7.5 7.4 7.3 7.4 7.9 7.1 6.8

$50,000–$99,999 8.6 8.7 8.7 8.8 8.8 8.5 8.6 9.1 8.4 8.2

$100,000–$249,999 9.2 9.0 9.4 9.6 9.8 10.1 10.2 10.5 10.0 10.0

$250,000+ 8.3 7.6 8.6 8.9 9.3 10.1 10.6 10.1 10.6 10.7


Deferral rates by employee demographicsAs with plan participation rates, employee demographics have a strong influence on deferral rates (Figure 28). Income is the primary determinant of deferral rates, which generally rise with income, but then decline as highly paid participants reach either the statutory maximum contribution level or plan-imposed caps on contributions related to nondiscrimination testing.

In 2010, participants with incomes of less than $30,000 had deferral rates averaging 4.8%, while participants earning $75,000 to $99,999 had deferral rates of 8.3%—a savings rate that is 73% higher. Deferral rates were 8.3% for participants earning $100,000 or more. The statutory maximum contribution was $16,500 ($22,000 for participants 50 and older), and a highly compensated employee was one who earned $110,000 or more.

Age is another important variable influencing savings. In 2010, deferral rates were lowest for participants younger than 25. This group saved only 3.9% of income. Deferral rates for participants ages 55 to 64 were more than twice as high, averaging 8.6%. Deferral rates also rose directly with employee tenure.

Deferral rates also are correlated with account balances. Participants with account balances of less than $10,000 had the lowest average deferral rate, 3.7% in 2010. As account balances rose, average deferral rates also rose. Overall, men and women appear to

save at similar rates. But, as with participation rates, the overall averages understate the difference because they fail to account for women’s lower incomes. Across every income group, women saved at rates that are about 5% to 10% higher than those of men (Figure 29).

Deferral rates also vary—by about one-third—by industry group (Figure 30). Participants in the agricultural, mining, and construction industry group had the highest deferral rates in 2010, while participants in the transportation, utilities, and communications group had the lowest deferral rates.

Impact of automatic enrollmentAs noted previously, the increased adoption of automatic enrollment contributed to a deterioration in deferral rates in 2009 and 2010, as compared with 2007, among most demographic measures. Plan design, specifically the predominant use of a 3% default deferral rate, means participants in plans with automatic enrollment are saving less. In addition, because of economic factors, other participants are choosing lower deferral rates.


Figure 29. Deferral rates by income and gender, 2010


Average deferral rate

Female Male All

<$30,000 5.1% 4.6% 4.8%

$30,000–$49,999 5.9 5.6 5.8

$50,000–$74,999 7.4 6.8 7.0

$75,000–$99,999 8.8 8.0 8.3

$100,000+ 8.7 8.0 8.3


Figure 30. Deferral rates by industry sector, 2010


Average deferral rate

Mean Median

Overall 6.8% 6.0%

Industry group

Agriculture, mining, and construction 7.9% 6.7%

Business, professional,and nonprofit 7.7 6.6

Education and health 7.9 6.0

Media, entertainment, and leisure 7.0 6.0

Finance, insurance, and real estate 6.6 6.0

Manufacturing 6.6 5.9

Wholesale and retail trade 6.2 5.2

Transportation, utilities, and communications 6.2 5.0


Participants in plans with an automatic enrollment feature at the end of 2010 have an average deferral rate of 6.3%, compared with 7.4% for participants in plans with voluntary enrollment—a deferral rate that is about 15% lower overall (Figure 31). This is especially remarkable in light of the fact that participants earning less than $30,000 save one-third more on average under voluntary enrollment designs. Our research on automatic enrollment suggests that “quit rates” do not deteriorate when higher default percentages are used to enroll employees.

However, because plans with automatic enrollment have higher participation rates, the overall deferral rate for all eligible employees (including participants and eligible nonparticipants) is higher in plans with automatic enrollment (Figure 32). When employees with elective deferrals of 0% are included in the calculations, automatic enrollment plans have an average deferral rate of 5.2%, compared with 4.2% for plans with voluntary enrollment—a deferral rate that is about 25% higher overall. Because there are fewer employees not contributing to the plan across all demographic measures, automatic enrollment plans have higher average employee deferral rates.

Maximum contributorsDuring 2010, only 9% of participants saved the statutory maximum dollar amount of $16,500 ($22,000 for participants age 50 or older) (Figure 33). Participants who contributed the maximum dollar amount tended to have higher incomes, were older, were more likely to be male, had longer tenures with their current employer, and had accumulated substantially higher account balances.

One-third of participants with incomes of more than $100,000 contributed the maximum allowed. Similarly, almost half of participants with account balances of more than $250,000 contributed the maximum allowed in 2010. About 2 in 10 participants older than 65 contributed the maximum.


Figure 31. Participant deferral rates by plan design, 2010


Average deferral rates


All 7.4% 6.3% 6.8%

Income

<$30,000 6.0% 4.4% 4.8%

$30,000–$49,999 6.1 5.5 5.8

$50,000–$74,999 7.3 6.8 7.0

$75,000–$99,999 8.5 8.1 8.3

$100,000+ 8.4 8.1 8.3

Age

<25 5.2% 3.4% 3.9%

25–34 5.8 5.0 5.4

35–44 6.7 5.7 6.2

45–54 7.7 6.8 7.2

55–64 9.1 8.1 8.6

65+ 10.7 9.3 10.1

Gender

Male 7.2% 6.3% 6.7%

Female 7.4 6.3 6.9

Job tenure (years)

0–1 6.0% 3.6% 4.4%

2–3 6.7 5.5 6.0

4–6 6.9 6.1 6.5

7–9 7.3 6.5 7.0

10+ 8.1 7.3 7.7

Account balance

<$10,000 3.9% 3.6% 3.7%

$10,000–$24,999 6.0 5.4 5.7

$25,000–$49,999 7.1 6.4 6.8

$50,000–$99,999 8.7 7.7 8.2

$100,000–$249,999 10.3 9.7 10.0

$250,000+ 10.5 11.0 10.7



Figure 33. Participants contributing the maximum, 2010


2010

All 9%

Income

<$30,000 0%

$30,000–$49,999 1

$50,000–$74,999 2

$75,000–$99,999 8

$100,000+ 37 Age

<25 0%

25–34 2

35–44 7

45–54 10

55–64 16

65+ 21 Gender

Male 9%

Female 7 Job tenure (years)

0–1 3%

2–3 6

4–6 8

7–9 10

10+ 11 Account balance

<$10,000 0%

$10,000–$24,999 1

$25,000–$49,999 3

$50,000–$99,999 8

$100,000–$249,999 19

$250,000+ 45 Industry group

Business, professional, and nonprofit 16%

Agriculture, mining, and construction 15

Media, entertainment, and leisure 15

Education and health 13

Finance, insurance, and real estate 10

Manufacturing 7

Wholesale and retail trade 5

Transportation, utilities, and communications 4


Figure 32. Employee deferral rates by plan design, 2010


Average deferral rates


All 4.2% 5.2% 4.6%

Income

<$30,000 1.6% 3.3% 2.4%

$30,000–$49,999 3.2 4.4 3.7

$50,000–$74,999 4.4 5.9 5.0

$75,000–$99,999 6.2 7.3 6.7

$100,000+ 7.1 7.6 7.3

Age

<25 1.0% 2.4% 1.6%

25–34 2.7 4.0 3.3

35–44 3.9 4.7 4.2

45–54 5.0 5.7 5.3

55–64 6.0 6.9 6.3

65+ 6.4 7.5 6.8

Gender

Male 3.9% 5.2% 4.5%

Female 4.3 5.1 4.6

Job tenure (years)

0–1 1.7% 2.7% 2.2%

2–3 2.9 4.4 3.5

4–6 3.9 5.0 4.4

7–9 4.8 5.3 5.0

10+ 5.8 6.3 6.0

Account balance

<$10,000 2.4% 3.1% 2.8%

$10,000–$24,999 5.2 4.9 5.0

$25,000–$49,999 6.5 5.9 6.2

$50,000–$99,999 8.1 7.3 7.7

$100,000–$249,999 9.8 9.4 9.6

$250,000+ 10.2 10.8 10.4


Catch-up contributionsEGTRRA authorized a higher catch-up contribution limit for participants 50 and older to be adopted by plan sponsors at their discretion. More than 90% of Vanguard plans offered catch-up contributions in 2010. Only 13% of age-50-and-older participants eligible for catch-up contributions took advantage of this feature in 2010 (Figure 34). The characteristics of participants making catch-up contributions are similar to those of participants making the maximum contribution to their plan. They tended to have higher incomes, were more likely to be male, and had accumulated substantially higher account balances.

Four in 10 participants with incomes of more than $100,000 made catch-up contributions. Similarly, 4 in 10 participants with account balances of more than $250,000 made catch-up contributions in 2010.

After-tax contributionsAfter-tax employee-elective deferrals are available to participants in one-fifth of Vanguard plans. The after-tax feature is more likely to be offered by large plans and more than half of all participants have access to this feature. In 2010, only 7% of employees who were offered the after-tax deferral feature took advantage of it (Figure 35). Those who used the feature also tended to have higher incomes and are older, longer-tenured employees.

Roth contributionsRoth contributions were originally introduced in EGTRRA and made permanent in the PPA in August 2006. At year-end 2010, the Roth feature was offered by 42% of Vanguard plans and had been adopted by 9% of participants in plans offering the feature (Figure 36). Those who used this feature tended to be younger and shorter-tenured participants.


Figure 34. Catch-up contribution participation rates by participant demographics, 2010

Vanguard defined contribution plans permitting catch-up contributions

2010

All 13%

Income

<$30,000 1%

$30,000–$49,999 1

$50,000–$74,999 3

$75,000–$99,999 11

$100,000+ 41

Gender

Male 13%

Female 10

Job tenure (years)

0–1 6%

2–3 11

4–6 12

7–9 14

10+ 13

Account balance

<$10,000 0%

$10,000–$24,999 1

$25,000–$49,999 3

$50,000–$99,999 6

$100,000–$249,999 16

$250,000+ 42

Industry group






Manufacturing 9





Figure 36. Roth participation rates by participant demographics, 2010

Vanguard defined contribution plans permitting Roth contributions

2010

All 9%

Income

<$30,000 8%

$30,000–$49,999 8

$50,000–$74,999 9

$75,000–$99,999 9

$100,000+ 9 Age

<25 16%

25–34 13

35–44 9

45–54 8

55–64 6

65+ 4 Gender

Male 9%

Female 8 Job tenure (years)

0–1 15%

2–3 12

4–6 8

7–9 7

10+ 6 Account balance

<$10,000 11%

$10,000–$24,999 10

$25,000–$49,999 8

$50,000–$99,999 7

$100,000–$249,999 7

$250,000+ 9 Industry group




Manufacturing 7






Figure 35. After-tax participation rates by participant demographics, 2010

Vanguard defined contribution plans permitting after-tax contributions

2010

All 7%

Income

<$30,000 3%

$30,000–$49,999 6

$50,000–$74,999 6

$75,000–$99,999 7

$100,000+ 16

Age

<25 2%

25–34 4

35–44 6

45–54 9

55–64 8

65+ 8

Gender

Male 6%

Female 7

Job tenure (years)

0–1 3%

2–3 4

4–6 4

7–9 5

10+ 10

Industry group

Agriculture, mining, and construction 20%

Business, professional, and nonprofit 9


Manufacturing 7





Aggregate contribution rates

Taking into account both employee and employer contributions, the average participant contribution rate in 2010 was 9.7% and the median was 8.8% (Figure 37). Both the average and median aggregate contribution rates were down modestly in 2009 and 2010. The average aggregate contribution rate in 2010 declined by 1.0 percentage points compared with 2007. Earlier in this section we noted that average participant deferral rates declined by 0.5 percentage points between 2007 and 2010.

These rates exclude eligible nonparticipants. When eligible nonparticipants, with their 0% contribution rate, are included, the average aggregate contribution rate is 6.9% and the median is 6.0%—also down, compared with the rates of 2007 (Figure 38). This decline is also attributable in part to the growing use of automatic enrollment and the tendency of

participants to stick with the default deferral rate adopted by the plan sponsor. However, it also reflects the decline in employer contributions during the low part of the recent economic cycle.

Distribution of aggregate contribution ratesVanguard’s view is that participants, depending upon income, should target a total contribution rate of 12% to 15% or more, including both employee and employer contributions. For participants with lower wages, Social Security is expected to replace a higher percentage of income. For higher-wage participants, Social Security replaces a lower percentage of income, and in fact, higher-wage participants may not be able to achieve sufficient savings rates within the plan because of statutory contribution limits. About one-third of participants in 2010 have total employee and employer savings rates that meet these thresholds (Figure 39).



10.4% 10.9% 10.7% 10.6%

9.8% 9.7% 9.6% 10.0% 10.0% 9.8%

9.0% 8.8%

Aggregate participant and employer contribution rates


Figure 37.

0

12%


2005 2006 2007 2008 2009 2010

Average Median

7.2% 7.8% 7.9%

8.3% 7.7%

6.9% 6.2%

7.0% 7.1% 7.7%

6.6% 6.0%

Aggregate employeeand employer contribution rates


Figure 38.

0

12%


Average Median

2005 2006 2007 2008 2009 2010

68%

16%

7% 9%

32%

48%

20%

11%

21%

32% 27%

21% 22%

30% 30%

<9% 9%–11.9% 12%–14.9% 15%+ Saving effectively

Distribution of aggregate participant and employer contribution rates, 2010


Figure 39.

0

80%

Note: The percentage noted after the income range is the total minimum contribution rate we estimate is needed for effective savings rates.Source: Vanguard, 2011.

Aggregate participant and employer contribution rate

Participant income <$50,000 (9%+) Participant income >$100,000 (15%+)Participant income $50,000–$100,000 (12%+)

Perc

enta

ge o

f pa

rtic

ipan

ts

Account balances

Account balances are a widely cited measure of the overall effectiveness of DC plans and are determined by contribution levels and investment performance over time.

Vanguard account balances are a measure of how much plan participants have accumulated for retirement at either their current or a prior employer. In the United States, DC plans are not a closed system. When participants change jobs or retire, their plan assets

3 A 2006 study from the Employee Benefit Research Institute found that for nearly one-third of participants, savings in their current employer plan represented “all or almost all” of their total retirement savings; and for another 15%, savings in their employer plan represented three-quarters of their total retirement savings.


Figure 41. Distribution of account balances

Vanguard defined contribution plans

Percentage of accounts

Range of balance 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

<$10,000 41% 40% 34% 32% 33% 32% 33% 39% 34% 31%

$10,000–$19,999 15 16 15 14 13 13 12 14 13 13

$20,000–$39,999 15 16 16 16 15 15 14 14 15 15

$40,000–$59,999 8 8 9 10 9 9 9 8 9 9

$60,000–$79,999 5 5 6 6 6 6 6 6 6 6

$80,000–$99,999 3 3 4 4 5 4 4 4 4 5

>$100,000 13 12 16 18 19 21 22 15 19 21


may remain with the plan of the employer they are leaving, may be rolled over to another employer plan or to an IRA, or may be cashed out. As a result, current DC plan balances may not reflect lifetime savings and are only a partial measure of retirement preparedness for many participants.3

Average versus median balancesIn 2010, the average account balance for Vanguard participants was $79,077; the median balance was $26,926 (Figure 40). As a result of rising markets and

$47,513 $45,634

$58,199 $65,216

$67,856

$75,791 $78,411

$56,030

$69,084

$79,077

$15,388 $15,474 $21,182 $23,811 $23,851 $25,953 $25,196

$17,399 $23,140

$26,926

Account balances


Figure 40.

0

$100,000


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average Median

ongoing contributions, average and median account balances for Vanguard participants grew by 14% and 16%, respectively, in 2010. Account balance measures are now at their highest level since we began tracking them in 1999 for How America Saves.

The wide divergence between the median and the average balance is due to a small number of very large accounts that significantly raises the average above the median (Figure 41). Three in 10 participants had a 2010 account balance of less than $10,000, while 21% had balances in excess of $100,000.

Because of the skewed distribution of assets, average balances are indicative of participants at about the 75th percentile (i.e., about 75% of all participants have balances below, and 25% have balances above the average). Average balances are more indicative of the results experienced by longer-tenured, more affluent, or older participants. The median balance represents the typical participant: Half of all participants have balances above the median, half have balances below.

Change in account balancesBetween October 2007 and March 2009, global stock markets fell by more than half, and the U.S. economy entered a protracted recession. Although the U.S. stock market regained 86% from its low, it still remains, at the end of 2010, 20% below its peak of October 2007.

Despite the substantial drop in stock prices during the 2007–2009 period, not all participants experienced falling account balances (Figure 42). When we examine continuous participants—those with an account balance in both December 2007 and December 2010—the median account balance rose by 31%. More than three-quarters of these continuous participants saw their balances rise or stay flat because of conservative asset allocations (for example, being invested exclusively or predominantly in fixed income holdings) and ongoing contributions. Among continuous participants with a balance in both December 2005 and December 2010—the median account balance rose 77%, and 91% of continuous participants had a higher account balance in 2010 than in 2005. 4

4 For additional analysis of participant account balance changes during this period, see Utkus, Stephen P. and Jean A. Young, 2011, The great recession and 401(k) plan participant behavior, Vanguard Center for Retirement Research, institutional.vanguard.com.


5% 5% 2% 1% 3% 1%

11%

2%

13%

3%

9% 9% 7% 8%

50%

71%

Change in account balances, continuous participants

Vanguard defined contribution participants with a balance at both the beginning and end of the period

Figure 42.

0

80%

>–30% –21% to –30% –11% to –20% –1% to –10% 0% to 10% 11% to 20% 21% to 30% >30%

December 31, 2007–December 31, 2010 December 31, 2005–December 31, 2010

December 31, 2007 December 31, 2005 to December 31, 2010 to December 31, 2010

Median change 31% 77%

Percentage of participants with positive changes 79 91


Account balances are widely available on statements and websites, and are often cited as participants’ principal tool for monitoring investment results. Because of ongoing contributions, account balances will appear to be less negatively impacted during falling markets. This “contribution effect” may mute the psychological impact of falling stock prices on participants.

Account balances by participant demographicsMedian and average account balances vary considerably by participant demographics (Figure 43). Among the factors influencing account balances are household income, age, and job tenure. These three factors are intertwined. Not only do incomes, on average, tend to rise somewhat with age, making saving more affordable, but older participants generally save at higher rates. Also, the longer an employee’s tenure with a firm, the more likely the employee is to earn a higher salary, participate in the plan, and contribute at higher levels. Longer-tenured participants also have higher balances because they have been contributing to their employer’s plan for a longer period.

Gender also influences current balances. Sixty percent of Vanguard participants are male, and men have average and median balances that are about 60% higher than those of women. Gender is often a proxy for other factors, such as income and job tenure. Women in our sample tend to have lower incomes and shorter job tenure than men. However, as noted earlier in this report, women tend to save more than men at the same income level.


Figure 43. Balances by participant demographics, 2010


All participants

Average Median

All $79,077 $26,926

Household income

<$30,000 $47,846 $14,341

$30,000–$49,999 49,609 18,301

$50,000–$74,999 64,656 26,709

$75,000–$99,999 88,356 39,557

>$100,000 135,530 63,094

Age

<25 $4,141 $1,475

25–34 20,332 9,429

35–44 50,091 23,481

45–54 96,631 43,809

55–64 140,672 61,850

>65 163,153 59,204

Gender

Male $95,675 $33,547

Female 58,833 21,499

Job tenure (years)

0–1 $10,154 $2,275

2–3 22,318 9,657

4–6 38,901 19,202

7–9 61,021 31,466

>10 138,419 72,915


Balances by plan size and industry groupAverage account balances also vary somewhat by plan size, with small-sized plans having slightly higher balances than larger plans (Figure 44). As noted earlier in this report, deferral rates are one factor driving differences in average balances—smaller plans have higher employee deferral and participation rates.

There are significant variations in account balances by industry sector, which reflect a complex mixture of firm characteristics (influencing employer contributions) and workforce demographics (influencing participant savings rates) (Figure 45). Participants employed in the agriculture, mining, and construction industries have average and median account balances that are about two times higher than other participants. Participants employed in the education and health trades have the lowest average and median account balances.


Figure 44. Account balance by plan size


Number of participants 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Average

<1,000 $49,163 $46,958 $59,611 $68,546 $73,032 $81,124 $83,988 $63,065 $77,875 $87,637

1,000–4,999 46,787 42,590 53,158 59,217 61,997 69,118 72,811 52,516 66,210 75,038

>5,000 47,549 47,099 60,640 67,894 70,068 78,234 80,127 56,331 68,648 79,178

All plans 47,513 45,634 58,199 65,216 67,856 75,791 78,411 56,030 69,084 79,077

Median

<1,000 $14,530 $15,169 $21,274 $25,020 $25,882 $27,770 $27,095 $20,403 $26,729 $30,816

1,000–4,999 15,396 15,169 20,333 22,471 22,859 24,753 24,254 16,834 22,824 26,427

>5,000 15,582 15,716 21,656 24,318 23,945 26,216 25,260 17,102 22,593 26,401

All plans 15,388 15,474 21,182 23,811 23,851 25,953 25,196 17,399 23,140 26,926


Figure 45. Balances by industry sector, 2010


Average Median

All $79,077 $26,926

Industry group

Agriculture, mining, and construction $184,394 $64,437

Business, professional, and nonprofit 85,301 29,539

Manufacturing 80,496 31,570

Finance, insurance, and real estate 76,262 30,156

Transportation, utilities, and communications 70,095 24,352

Media, entertainment, and leisure 64,529 29,558

Wholesale and retail trade 56,715 18,168

Education and health 54,414 15,926


2 Managing participant accounts

Participant investment decisions are a critical determinant of long-term retirement savings growth.

Asset and contribution allocations

As a result of the market rebound and participant trading activity, the percentage of plan assets invested in equities rose to 68% in 2010, up from 61% in 2008, a shift of 7 percentage points (Figure 46). However, compared with 2007, equity allocations are still down 5 percentage points. We estimate

that approximately half of this movement, or 2 points, resulted from traders shifting assets to fixed income holdings on a net basis; the remaining 3 points came largely from declining stock prices.

In 2010, investment in balanced strategies reached 22%, including 12% in target-date funds and 10% in other balanced options. Allocations to cash

42 > Managing participant accounts

10%

43%

12%

10%

9%

16%

66%equities

Plan asset allocation summary


Figure 46.

68%equities

71%equities

64%equities

69%equities

71%equities

71%equities

73%equities

73%equities

61%equities

20090

100%


Company stock Diversified equity funds Other balanced funds Bond funds CashTarget-date funds

20102001 2002 2003 2004 2005 2006 2007 2008

14% 15% 14% 14% 13% 12% 11% 10% 10%

49%41% 47% 49% 50% 52% 51%

39%43%

3% 5%

7%

9%

13%

13%

13%13% 13%

12% 12%

11%

11%

6%

9%7%

6% 6% 5% 6%

10%

9%

18%22%

19% 18% 17% 16% 15%

23%18%

investments (money market and stable value funds) and bonds declined slightly to 25% of plan assets by year-end 2010, down from 33% at year-end 2008.

Participant contribution allocations to equities increased by 2 percentage points in 2010 (Figure 47). A total of 70% of 2010 employee contributions was directed to equity investments or the equity component of balanced strategies during the year.

(Note: 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. Past performance is no guarantee of future results.)

Managing participant accounts > 43

68%equities

7%

41%

16%

13%

8%

15%

Participant contribution allocation summary


Figure 47.

0

100%

* Diversified equity, company stock, and 60% of balanced funds.Source: Vanguard, 2011.

Company stock Diversified equity funds Other balanced funds Bond funds CashTarget-date funds

70%equities

76%*equities

10%

58%

13%

5%

14%

71%*equities

11%

52%

14%

7%

16%

67%*equities

11%

48%

14%

10%

17%

71%*equities

11%

51%

15%

8%

15%

71%*equities

10%

51%

15%

7%

15%

72%equities

9%

51%

15%

4%

6%

15%

74%equities

8%

51%

14%

8%

6%

13%

73%equities

8%

46%

13%

13%

7%

13%

2009 20102001 2002 2003 2004 2005 2006 2007 2008

6%

40%

22%

11%

8%

13%

Asset allocation by participant demographicsAsset allocation decisions vary meaningfully by participant demographics (Figure 48). Household income and age are key factors influencing investment decisions. Higher-income participants tend to take on somewhat more equity market risk than do lower-income participants. However, at least among Vanguard participants, the differences in equity exposure by income are not dramatic. In 2010, participants with household incomes of less than $30,000 had 64% of their average account balance allocated to equities; for participants with household incomes of more than $100,000, the figure was 69%.

Participants younger than age 45 had the highest equity exposure, with about 80% of plan assets, on average, invested in equities in 2010. Equity allocations were lowest for participants older than age 65, many of whom are currently retired or will soon retire. Participants older than age 65 had an average equity allocation of 49%.

It remains a topic of debate as to why older participants end up with more conservative allocations. One explanation is that, as they age, participants gradually shift assets from equities to fixed income. A second possibility is based on demographic cohorts. Participants in a particular generational cohort may develop similar investment risk preferences based on shared life experiences. For example, middle-aged investors may hold more in equities because of a greater awareness of the potential returns on equities, the influence of the 1983–2000 bull market, or a greater acceptance of financial risk-taking.

A third possible explanation is participant inertia. Few participants make changes in their portfolios and so many may fail to make age-appropriate changes to their asset allocations. Although research has not resolved the debate about these issues, it’s likely that all three factors play a role: active portfolio shifts away from equities by older investors, common risk-taking patterns among generational cohorts, and pervasive inertia in participant decision-making.

A development affecting allocations among younger participants is the change in default investing. Participants younger than age 25 are more than twice as likely to be using the plan default fund compared with other participants. Previously, such funds were often conservative investments. Increasingly, default funds are target-date and other balanced options reflecting a better mix of risk and return for retirement portfolios. As a result, the allocations of younger and shorter-tenured individuals have shifted toward the allocations of the broader participant population.

Overall, women have a 2-percentage-point-lower allocation to equities than men. The allocation to company stock tends to rise as job tenure increases—evidence perhaps of the “endorsement” effect of employer contributions in company stock, as well as participants’ loyalty to their employers.



Figure 48. Asset allocation by participant demographics, 2010


Diversified Other Company equity Target-date balanced Bond Total stock funds funds funds funds Cash equity

All 10% 43% 12% 10% 9% 16% 68%

Household income

<$30,000 12% 36% 13% 10% 8% 21% 64%

$30,000–$49,999 10 38 14 10 8 20 65

$50,000–$74,999 10 41 13 11 8 17 67

$75,000–$99,999 10 43 12 10 9 16 68

$100,000+ 9 46 11 10 10 14 69

Age

<25 8% 22% 52% 9% 3% 6% 81%

25–34 7 43 26 11 6 7 79

35–44 7 52 15 10 7 9 79

45–54 11 47 12 10 8 12 73

55–64 10 38 11 10 11 20 61

65+ 9 31 8 9 12 31 49

Gender

Male 10% 43% 12% 10% 9% 16% 69%

Female 7 42 13 12 10 16 67

Job tenure (years)

0–1 4% 37% 32% 9% 8% 10% 72%

2–3 6 39 30 10 7 8 75

4–6 6 46 19 11 8 10 74

7–9 7 47 13 12 9 12 71

10+ 11 42 10 10 9 18 66

Account balance

<$10,000 5% 19% 44% 14% 4% 14% 68%

$10,000–$24,999 6 32 28 13 6 15 68

$25,000–$49,999 6 39 20 13 7 15 69

$50,000–$99,999 6 44 15 12 8 15 69

$100,000–$149,999 6 47 13 11 8 15 69

$150,000–$199,999 7 47 12 10 9 15 69

$200,000–$249,999 8 47 11 10 9 15 69

$250,000+ 14 43 8 8 10 17 67


Asset allocation by plan size and industry sectorThe average allocation to equities does not vary significantly by plan size (Figure 49). However, among larger plans, there is a substitution of company stock holdings for diversified equity funds and a modestly larger allocation to equities overall. Large plans are more likely than small plans to offer company stock. Moreover, large firms are more likely to make employer matching or other contributions in stock. As a result, certain large firms have significantly higher exposure to company stock as an asset class.

Company stock accounted for 10% of assets for all DC plans at Vanguard in 2010. Among large plans, 14% of assets were allocated to company stock at year-end 2010, compared with a 1% allocation among small plans. These averages include plans offering—and plans not offering—company stock. The averages for just those plans offering company stock to participants are higher (see page 54).

Balanced funds, including target-date funds, accounted for 22% of assets for all DC plans at Vanguard in 2010—up from 13% in 2001. Among small plans, 27% of assets were allocated to balanced funds at year-end 2010, compared with a 21% allocation among large plans.

Overall asset allocations vary by industry group as well (Figure 50). Participants in the finance, insurance, and real estate industries have the most conservative allocations, while participants in the agriculture, mining, and construction industries have the most aggressive allocations and the highest allocations to company stock.

Participant equity allocationsEquities are the dominant asset holding of many plan participants. From an investment perspective, an average asset allocation to equities of 68% or more may appear appropriate in light of the long-term retirement objectives of most DC plan participants. However, the allocation to equities varies dramatically among participants (Figure 51). At one extreme, 9% of participants had no allocation to equities at year-end 2010. At the other extreme, 13% of participants had their entire plan account invested in equities.

These results underscore a tendency of some DC plan participants to adopt extreme investment allocations. Just more than one-fifth of participants in 2010 held extreme allocations—either with zero equity holdings or with 100% equity exposure. These extreme allocations are one reason for the increasing use of automatic investment programs, such as target-date funds or managed accounts, which can help offset such extremes (see page 56).

Not all conservatively or aggressively invested participants are making portfolio errors. Some participants are clearly making choices based on their objectives, time horizon, risk tolerance, or other personal factors. But it is possible that others may have taken on low- or high-risk positions naively, perhaps because of a lack of investment knowledge or a tendency to chase market returns. For example, in the case of 100% equity investors, one measure of the tendency to chase market performance is that in the aftermath of two bear markets, the number of participants with their entire portfolios invested in equities declined by more than half, from 30% of participants in 2001 to 13% in 2010.


Figure 49. Asset allocation by plan size, 2010


Plan participants

1,000– All <1,000 4,999 5,000+ plans

Total equity 66% 66% 69% 68%

Company stock 1% 5% 14% 10%

Diversified equity 48 45 41 43

Target-date funds 12 11 9 12

Other balanced funds 15 13 12 10

Bond funds 10 9 8 9

Cash 14 17 16 16



Figure 50. Asset allocation by industry sector, 2010


Diversified Other Company equity Target-date balanced Bond Total stock funds funds funds funds Cash equity

All 10% 43% 12% 10% 9% 16% 68%

Industry group

Agriculture, mining, and construction 35% 28% 9% 5% 7% 16% 72%

Business, professional, and nonprofit 8 48 13 9 10 12 71

Media, entertainment, and leisure 1 51 14 13 10 11 71

Transportation, utilities, and communications 10 45 10 9 8 18 68

Manufacturing 7 42 14 11 8 18 66

Wholesale and retail trade 5 44 15 10 8 18 66

Education and health 0 48 11 18 11 12 66

Finance, insurance, and real estate 3 45 16 7 9 20 64


Figure 51. Distribution of equity exposure

Vanguard defined contribution participants

Percentage of participants

Percentage of contributions Percentage to equities, in equities 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010

0% 12% 13% 14% 13% 13% 13% 11% 11% 11% 9% 10%

1%–10% 2 2 2 2 2 2 1 2 2 2 1

11%–20% 2 3 2 2 2 2 2 2 2 2 1

21%–30% 2 3 2 2 2 2 2 3 2 2 2

31%–40% 3 4 3 3 3 3 2 4 3 3 2

41%–50% 5 6 6 6 6 5 6 4 6 6 7

51%–60% 5 5 6 6 6 5 5 9 7 6 6

61%–70% 8 9 9 10 10 10 11 12 11 10 10

71%–80% 8 8 9 10 9 11 11 11 11 12 12

81%–90% 12 11 12 13 14 16 19 18 22 26 27

91%–99% 11 9 11 11 12 12 13 8 9 9 8

100% 30 27 24 22 21 19 17 16 14 13 14


Current market conditions play an important role in influencing portfolio decisions among new enrollees in a plan. During the prior bear market in U.S. stocks (2000–2002), we observed that newly enrolled participants tended to invest more conservatively during declining markets. To explore this effect in the current market cycle, we analyzed how participants are currently allocating their contributions based on the year they entered their employer’s retirement plan. Participants who enrolled during 2008–2010 were allocating about 72% of contributions to equities, only slightly below those enrolling during 2007 (Figure 52).5

This decline is much less pronounced than the decline observed in 2003 after the 2000–2002 bear market. At the low point during the previous market decline, participants who had enrolled in the first six months of 2003 allocated just 43% to equities.6 The growing use of target-date funds (see page 56) and rising use of automatic enrollment suggest that equity allocations may not fall as dramatically as in the prior market decline. In fact, for the first time, in 2010, new enrollees allocated more than half of their total contributions to target-date funds.

5 We do not have ready access to contribution allocations over time and so instead focus on current contribution allocations by date of plan entry. 6 Utkus, Stephen P. and Jean A. Young, 2004, Participant report card for December 2003: Rising stock prices contribute to higher returns and account balances,

Vanguard Center for Retirement Research, institutional.vanguard.com.


Current contribution allocation by plan entry date, 2010


Figure 52.

Contributions from January 1, 2010, through December 31, 2010

0

100%

2000Pre-2000

Percentage of total 2010 contributions allocated to equities Percentage of total 2010 contributions allocated to target-date funds

2001 2002 2003 2004

Year participant entered plan

2005 2006 2007 2008 2009 2010


68% 72% 69% 68% 69% 71% 72% 72% 74% 72% 71% 73%

11% 12% 14% 12% 15% 15% 19%

24%

34%

42% 48%

54%

Distribution of participants with contributions in 2010 by year of plan entry

29% 4% 4% 4% 4% 4% 5% 8% 9% 11% 8% 10%

Plan investment options

Participant investment and asset allocation decisions in DC plans occur within the context of an overall set or menu of choices offered by the employer.

Number of options offered and usedPlan sponsors continue to increase the number of investment options available to participants. The average Vanguard plan offered 26 investment options in 2010, up from 15 options at the beginning of the decade—an increase of 79% (Figure 53). Among the factors driving the introduction of new funds are

the demand for increased flexibility from participants; the development of new fund types (e.g., the growing use of target-date funds in recent years); and plan sponsors’ ongoing analysis of asset classes.

The growth in the number of funds offered has been influenced by the increased use of “all-in-one” funds such as target-date funds. When each distinct target-date (or target-risk) fund is counted as a single offering, the average number of investment options for 2010 is 26. But when an entire series of such funds is counted as a single offering, the average number of investment options offered falls to 19.


14.6 15.6 16.4

17.7 18.6 20.1

22.5 24.0

25.1 26.1

14.5 15.3 15.7 16.2 16.5 16.9 17.6 17.9 18.3 18.6

3.1 3.2 3.3 3.4 3.6 3.6 3.6 3.4 3.4 3.3

Average number of investment options offered and used


Figure 53.

0

30


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Each target-date and target-risk fund offered counted separately

Each target-date or target-risk series offered counted as a single fund

Average number of funds used by participants

By this measure, sponsors have added one series of target-date (or target-risk) funds and three other investment options since 2001—not the 11 additional options implied by the aggregate number. Counting a target-date or target-risk series as a single-fund offering, the median plan sponsor offered 14 investment options in 2010.

Sponsors continue to add investment options at a faster rate than participants actually use them. In 2010, two-thirds of plans offered between 11 and 20 options (Figure 54), yet 62% of participants used only 1, 2, or 3 of them (Figure 55). In fact, despite the growing number of funds available to them, participants’ use of fund options has grown only slightly since 2000. The average Vanguard participant used 3.3 options in 2010, up 6% from the 3.1 options used in 2001.

Types of options offeredVirtually all Vanguard DC plans offer an array of investment options covering four major investment categories: equities, bond funds, balanced funds (including target-date and target-risk strategies), and money market or stable value options (Figure 56). Given most sponsors’ desire to promote equity-oriented portfolios for retirement, diversified equity funds continue to be the most popular type of fund offered. Equity offerings typically include both indexed and actively managed U.S. stock funds, including large-capitalization and mid- or small-capitalization stocks, as well as one or more international funds.

While plan sponsors offer a variety of large-cap equity funds, they are less likely to offer a mid-cap domestic equity fund, no doubt in part because many large-cap funds incorporate mid-cap stocks in their mandates. Small-cap domestic equity funds are offered more frequently than mid-cap domestic equity funds.


37%

14% 11% 10% 9%

7% 4% 3%

5%

1 2 3 4 5 6 7 8 9+

Number of investment options used, 2010

Perc

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sing


Figure 55.

0

50%


Number of options

Number of investment options offered, 2010


Figure 54.

0

50%


Each target-date and target-risk fund offered counted separately

Each target-date or target-risk series offered counted as a single fund

1%

5%

10%

19%

30%

35%

2%

13%

43%

23%

7%

12%

1–5 6–10 11–15 16–20 21–25 26+

Perc

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Number of options


Figure 56. Type of investment options offered, 2010


Percentage of plans offering


All < 1,000 1,000–4,999 5,000+

Cash 98% 98% 99% 99%

Money market 68 70 63 64

Stable value/investment contract 58 57 63 64

Bond funds 98% 98% 99% 99%

Active 63 61 70 67

Index 86 87 84 85

Inflation-protected securities 27 26 29 40

High-yield 18 17 22 22

Balanced funds 98% 98% 99% 99%

Traditional balanced 78 79 77 74

Target-risk 29 30 25 28

Target-date 79 74 92 91

Equity funds 99% 98% 99% 99%

Domestic equity funds 99% 98% 99% 99%

Active domestic 95 95 96 93

Index domestic 98 98 99 99

Large-cap value 92 92 92 88

Large-cap growth 92 92 95 92

Large-cap blend 98 97 99 99

Mid-cap 84 84 87 80

Small-cap 86 86 91 81

International equity funds 97% 96% 98% 98%

Active international 85 84 88 88

Index international 49 48 50 56

Emerging markets 22 21 24 25

Sector funds 32% 33% 30% 29%

REIT 26 26 27 26

Health care 13 13 12 17

Energy 9 8 9 15

Precious metals 5 4 7 13

Technology 3 3 2 3

Utilities 1 1 0 1


Self-directed brokerage 11% 10% 11% 21%

Managed account program 13% 6% 31% 38%



Plan sponsors also offer international equity funds, but only 22% offer separate emerging markets funds. Many of the broader international funds include emerging markets exposure already. Thirty- two percent of plan sponsors offer sector funds, such as technology or health care funds. One in 10 plan sponsors offer a self-directed brokerage feature. Meanwhile, plan sponsor interest in target-date funds continued to grow dramatically. At year-end 2010, 79% of plans offered target-date funds.

The types of investment options offered do not vary substantially by plan size. However, large plans are much more likely than small plans to offer company stock, self-directed brokerage accounts, and managed account programs. In addition, larger plans have been quicker than smaller plans to add target-date funds and inflation-protected securities funds.

Types of options usedAmong the options offered by DC plans, which do participants actually use? In 2010, a balanced fund was the most common participant holding (64% of participants) closely followed by a diversified equity fund (54% of participants) (Figure 57). Among the balanced options held, target-date funds were overwhelmingly more likely to be held (48% of participants offered) than traditional balanced funds (28% of participants offered) or target-risk funds (26% of participants offered). Before 2008 participants were most likely to hold a diversified equity fund. This trend reversal was first observed in 2009.

Nearly all participants were offered a U.S. equity index fund, yet only 39% used that option. However, participants holding balanced strategies (whether traditional, target-date, or target-risk) are holding substantial equity index exposure. When participants holding index investments through all balanced options are factored in, 76% of Vanguard participants hold some U.S. equity index exposure. Only about one-quarter of participants chose to hold a bond fund, yet one-third chose a money market or stable value cash investment.

Most Vanguard DC participants were offered an international equity fund, but only 3 in 10 participants chose to use one. Emerging markets funds were offered and used even less frequently; only 20% of participants had access to them and only 11% of those chose to use one.

Sector funds were offered to one-quarter of participants in 2010 and were also used infrequently; only 13% of participants who were offered these funds used them.

Twenty-two percent of all Vanguard participants were offered a self-directed brokerage feature. Self-directed brokerage accounts allow participants to choose investments from thousands of individual stocks, bonds, and mutual funds. In plans offering a self-directed brokerage feature, only 1% of participants used the feature in 2010. Their holdings accounted for 2% of assets in these plans, suggesting that higher-balance participants are the predominant users of a brokerage option.


Figure 57. Type of investment options offered and used, 2010


Percentage Percentage Percentage of plans of participants of participants offering offered offered using

Cash 98% 99% 34%

Money market 68 65 25

Stable value/investment contract 58 68 29

Bond funds 98% 98% 27%

Active 63 67 16

Index 86 84 22

Inflation-protected securities 27 36 5

High-yield 18 16 6

Balanced funds 98% 97% 64%

Traditional balanced 78 76 28

Target-risk 29 31 26

Target-date 79 86 48

Equity funds 99% 98% 54%

Domestic equity funds 99% 98% 51%

Active domestic 95 94 39

Index domestic 98 98 39

Large-cap value 92 90 22

Large-cap growth 92 94 25

Large-cap blend 98 98 33

Mid-cap 84 78 22

Small-cap 86 80 20

International equity funds 97% 98% 30%

Active international 85 87 26

Index international 49 54 19

Emerging markets 22 20 11

Sector funds 32% 23% 13%

REIT 26 20 8

Health care 13 11 8

Energy 9 9 8

Precious metals 5 6 3

Technology 3 3 9

Utilities 1 1 6

Company stock 11% 33% 59%

Self-directed brokerage 11% 22% 1%

Managed account program 13% 41% 7%


Company stockCompany stock is more likely to be offered as an investment option by a large plan—43% of Vanguard plans with 5,000 or more participants offered company stock, compared with only 4% of plans with fewer than 1,000 participants. In most plans that offer company stock, participants can choose whether or not to invest their own contributions in this option. Employer contributions—which may be 401(k) matching, profit-sharing, or ESOP contributions—are either directed to company stock by the employer, invested at the participant’s discretion, or a combination of the two.

As of 2010, only 11% of Vanguard recordkeeping plans offered company stock as an investment option. However, because large plans are more likely to offer company stock, 33% of Vanguard recordkeeping participants had access to company stock in their employer’s plan. Among all Vanguard participants:

• 80% had no company stock investments in 2010—either because their employer did not offer company stock (67%) or because they chose not to invest in it (13%).

• 10% had company stock holdings of 1% to 20% of their account balances in 2010.

• 10% had concentrated positions exceeding 20% of their account balances as of 2010.

Among Vanguard plans actively offering company stock, 80% had 20% or less of plan assets invested in company stock (Figure 58). The remaining 20% had concentration levels of more than 20%. This is an improvement from 2004, when one-third of these plans had concentration levels of more than 20%.

In 2010, 43% of Vanguard participants who were offered company stock in their plan chose not to invest their contributions—or their employer’s contributions—in company stock. If they received employer stock contributions, they diversified these assets. At the other extreme, 3 in 10 participants in plans actively offering company stock had more

than 20% of their account balance invested in company stock—and 10% had more than 80% of their account balance in company stock.

During 2010, the modest but discernible shift in participant company stock holdings that was first evident in 2006 continued. The number of participants in plans with company stock and holding a concentrated position of more than 80% of their account balance in company stock fell from 15% in 2005 to 10% in 2010. Among the factors driving this change may be the participant diversification notice rules required under the PPA.

Despite this shift, why do 3 in 10 participants in plans offering company stock continue to hold a concentrated position in their employer’s stock? One reason is that most participants view company stock as a safer investment than a diversified equity fund. Another factor encouraging concentrated stock holdings is the plan sponsor’s decision to make an employer contribution in company stock. This implied endorsement often leads participants to invest more of their own savings in the stock as well.

The effect is evident in the average company stock allocation for plans making employer contributions in cash compared with those making employer contributions in stock. In 2010, plans offering company stock as an investment option but matching in cash had an average of 10% of plan assets invested in company stock (Figure 59). Meanwhile, plans offering company stock as an investment option and matching in stock had an average of 37% of plan assets in company stock.

Use of international fundsParticipants who used international equity funds invested 17% of their plan assets, on average, in the option in 2010 (Figure 60). The percentage of participants using international equity funds has grown by more than 50% since 2001, but only 3 in 10 participants who were offered international funds in 2010 used them.



Figure 58. Company stock exposure for plans and participants

Vanguard defined contribution plans actively offering company stock

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Balance of plan in company stock—percentage of plans

1%–20% 65% 67% 67% 66% 68% 73% 77% 82% 79% 80%

21%–40% 21 19 20 21 21 19 17 10 15 13

41%–60% 7 7 6 9 7 5 4 6 5 6

61%–80% 2 2 2 0 1 1 1 1 0 0

>80% 5 5 5 4 3 2 1 1 1 1

Balance in company stock—percentage of participants

0% 35% 34 34% 34% 35% 37% 42% 44% 45% 43%

1%–20% 22 21 22 22 23 25 26 26 25 26

21%–40% 14 13 14 16 15 15 13 12 12 12

41%–60% 9 9 9 9 8 9 7 6 6 6

61%–80% 4 5 4 4 4 5 4 3 3 3

>80% 16 18 17 15 15 9 8 9 9 10


Figure 59. Impact of company stock employer contributions on asset allocation, 2010

Vanguard defined contribution plans actively offering company stock

All Vanguard 401(k) plans with an employer contribution

Plans offering Plans offering company stock Vanguard defined Plans matching company stock matching in contribution plans in cash matching in cash company stock


Diversified equity funds 43 48 42 28

Balanced funds 22 25 22 14

Bond funds 9 10 8 8

Cash 16 16 18 13


Figure 60. Use of international funds


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Percentage of plans offering 90% 91% 92% 93% 96% 96% 97% 97% 97% 97%

Percentage of plan assets invested (if offered) 3 3 3 4 5 8 9 6 8 8

Percentage of participants using (if offered) 19 19 20 23 26 30 33 31 31 30

Percentage of account balances (if used) 12 11 12 13 15 18 20 15 17 17



Target-date funds

Target-date funds base portfolio allocations on an expected retirement date; allocations grow more conservative as the participant approaches the fund’s target year. Target-date fund use has accelerated from 13% of plans in 2004 to 79% of plans in 2010 (Figure 61). At year-end 2010, nearly 9 in 10 participants were in plans offering target-date funds. Forty-two percent of all participants were invested in target-date funds in 2010. Fully 22% of total 2010 contributions were directed to target-date funds.

Among plans offering the strategy, target-date options accounted for 1 of every 7 dollars of plan assets in 2010 (Figure 62). In these plans 26% of all contributions in 2010 were directed to target-date funds.

Target-date funds are gradually replacing target-risk funds, which maintain a static risk allocation (Figure 63). Since 2003, the fraction of plans offering only target-risk funds as one of their investment options has fallen from 50% of plans to 12% of plans. Another 17% of plans maintain both target-risk and target-date funds, although for some of these plans, new contributions into the target-risk funds may be restricted.

Figure 61. Use of target-date funds


2004 2005 2006 2007 2008 2009 2010

Percentage of all plans offering target-date funds 13% 28% 43% 58% 68% 75% 79%

Percentage of recordkeeping assets in target-date funds 0 1 3 5 7 9 12

Percentage of all contributions directed to target-date funds 0 2 4 8 13 16 22

Percentage of all participants offered target-date funds 14 29 46 67 76 81 86

Percentage of all participants using target-date funds 2 5 10 18 28 34 42



Figure 62. Use of target-date funds, plans

Vanguard defined contribution plans offering target-date funds

2004 2005 2006 2007 2008 2009 2010

Percentage of plan assets invested in target-date funds 3% 5% 6% 7% 9% 12% 15%

Percentage of plan contributions invested in target-date funds 3% 6% 9% 12% 17% 21% 26%

Distribution of percentage of plan assets in target-date funds

<5% 74% 58% 49% 39% 27% 23% 16%

5%–9% 15 17 22 24 28 25 22

10%–14% 5 9 9 13 16 17 19

15%–19% 1 4 5 6 9 10 13

>20% 5 12 15 18 20 25 30

Distribution of percentage of plan contributions to target-date funds

<5% 73% 46% 31% 23% 13% 11% 8%

5%–9% 12 20 22 18 14 11 9

10%–14% 9 13 16 16 16 13 11

15%–19% 1 5 9 13 16 16 14

>20% 5 16 22 30 41 49 58


12%

17%

62%

91%

2009

Trend in plan adoption of target-date and target-risk funds


Figure 63.

0

100%


Target-risk Both Target-date

20102001 2002 2003 2004 2005 2006 2007 2008

Perc

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40% 44%50% 45%

39%33%

26%19% 15%

15%14%

11%8%

6%6%

60%54%47%35%22%7%

40%

87%84%

76%

67%

58%

50%44%

90%

79%

Participant use of target-date fundsAmong participants investing in target-date funds, 41% of account balances were invested in these funds (Figure 64). These target-date participants directed 67% of their 2010 total contributions to target-date funds. Participants invest in target-date funds in one of two ways. “Pure” investors hold a single target-date fund. They accounted for 48% of all target-date investors in 2010. The remaining target-date investors are “mixed” investors. They hold a target-date fund in combination with other investments (or, less commonly, multiple target-date funds and/or other options).

Our research indicates that about half of participants become mixed investors through some type of plan sponsor actions. These include: employer contributions

in company stock; nonelective contributions to the plan’s default fund; recordkeeping corrections applied to the plan’s default fund; or mapping of assets from an existing investment option to a target-date default because of a plan menu change.7 On the other hand, the other half of mixed investors intentionally construct a portfolio of both target-date and non-target-date strategies. Many are pursuing what appear to be reasonable diversification strategies, although they do not fit within the “all-in-one” portfolio approach of the target-date concept.

Our research indicates that “pure” investors are more likely to be younger, lower-wage, shorter-tenured participants with lower 401(k) account balances than

7 See Pagliaro, Cynthia A. and Stephen P. Utkus, 2010, Mixed target-date investors in defined contribution plans, institutional.vanguard.com.


Figure 64. Use of target-date funds, participants

Vanguard defined contribution participants using target-date funds

2004 2005 2006 2007 2008 2009 2010

Percentage of participant account balances in target-date funds 31% 36% 36% 38% 37% 38% 41%

Percentage of total participant and employer contributions 32 37 48 52 57 63 67

Distribution of percentage of participant assets in target-date funds

1%–24% 51% 38% 32% 28% 26% 26% 24%

25%–49% 21 17 15 13 12 12 11

50%–74% 7 7 8 8 7 8 8

75%–99% 4 5 7 7 6 7 8

100% 17 33 38 44 49 47 49

Distribution of percentage of total participant and employer contributions in target-date funds

1%–24% 47% 41% 28% 24% 19% 16% 14%

25%–49% 23 18 16 14 13 11 11

50%–74% 9 8 7 7 7 7 6

75%–99% 5 5 4 4 5 4 5

100% 16 28 45 51 56 62 64

Percentage of participants owning

One target-date fund only 17% 32% 37% 43% 46% 46% 48%

One target-date fund plus other funds 65 58 54 48 46 46 44

Two or more target-date funds only 1 1 1 1 2 2 2

Two or more target-date funds plus other funds 17 9 8 8 6 6 6


other investors. Meanwhile, “mixed” investors appear very much like non-target-date investors in terms of their demographic and portfolio characteristics.

In January 2010, Vanguard fielded a survey designed to gauge investor comprehension and use of target-date funds.8 The survey finds that investors who are aware of target-date funds generally possess a solid understanding of the basic design of the funds. The survey also found a variety of reasons that mixed investors diversified among target-date and non-target-date funds. Large percentages of participants reported that they held other assets to be more conservative, more aggressive, or more customized in their portfolio allocation. Forty percent of participants cited “diversification” as a reason for holding additional investments with a target-date fund.

Target-date funds and equity allocationsThe increase in the adoption of target-date funds by both plan sponsors and plan participants is reshaping participant portfolios. One of the benefits of target-date funds is that they eliminate extreme equity allocations.

Non-target-date participants tend to hold greater extremes in equity exposure (Figure 65). As noted previously, a total of 22% of all Vanguard participants hold extreme allocations (9% with no equities, 13% with only equities). Target-date investors cannot hold extreme positions because target-date options include both equity and fixed income assets.

Among pure target-date investors, virtually all have equity allocations ranging from 51% to 90% of their portfolios. A large group of pure target-date investors has equity allocations in the 81%-to-90% range. This phenomenon reflects two facts: (1) automatic enrollment into target-date funds typically applies to new hires who are disproportionately younger than 40; and (2) in voluntary enrollment plans, a single target-date fund is a popular strategy among new hires as well. Mixed target-date investors tend to have a wider dispersion of results, but still avoid the extreme allocations because of their partial investment in a target-date strategy.

8 See Ameriks, John, Dean J. Hamilton, and Liqian Ren, 2011, Investor comprehension and usage of target-date funds: 2010 survey, institutional.vanguard.com.


9%

1% 1% 1% 1%

5%

3%

6% 6% 7%

5%

13%

1% 1% 1%

3%

14%

1% 1% 1% 2% 2%

3% 3%

5% 4%

2010 Vanguard defined contribution participants

Distribution of equity exposure compared for target-date and non-target-date fund investors, 2010Figure 65.

0

20%

Perc

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Equity exposure percentage

0% 1%–10% 11%–20% 21%–30% 31%–40% 41%–50% 51%–60% 61%–70% 71%–80% 81%–90% 91%–99% 100%


Pure target-date investor (20% of all participants) Non-target date investor (58% of all participants)

Mixed target-date investor (22% of all participants)


Figure 66. Plan design and target-date funds, 2010



Among all plans

Percentage of plans offering target-date funds 74% 95% 79%

Percentage of participants offered target-date funds using target-date funds 44 54 48

Pure investors holding a single target-date fund 45 50 48

Mixed investors holding target-date and other funds 55 50 52

Among participants holding target-date funds

Pure investors holding a single target-date fund 21% 27% 48%

Mixed investors holding target-date and other funds 26 26 52

Percentage of participants holding target-date funds 47% 53% 100%

Note: A plan and its participants are categorized as an automatic enrollment design if the plan had adopted automatic enrollment in 2010 or prior. As noted previously in this report, automatic enrollment is typically applied only to newly eligible participants. Many participants in automatic enrollment plans were hired under traditional voluntary enrollment designs. Hence, not all participants using target-date funds in plans with automatic enrollment designs were defaulted into the funds.


Plan design and target-date fundsAs noted earlier in this report, 24% of plans with employee-elective deferrals have adopted automatic enrollment—and overwhelmingly in these plans, target-date funds are the default investment option. However, about half of participants holding target-date funds are in plans that use traditional voluntary enrollment (Figure 66). In other words, about half of participants holding target-date funds have actively chosen the funds.

Professionally managed allocationsParticipants with professionally managed allocations are those who have their entire account balance invested solely in a single target-date, target-risk, or traditional balanced fund, or a managed account advisory service.

Due in part to the growing use of target-date funds and automatic enrollment, the fraction of participants with a professionally managed account allocation is expanding. At year-end 2010, 29% of all Vanguard participants were solely invested in a single, professionally managed, automatic investment option—compared with just 7% only six years ago (Figure 67). Twenty percent of all Vanguard participants were invested in a single target-date fund. Another 6% of all Vanguard participants were invested in a

single target-risk or traditional balanced fund and 3% were using a managed account program. These professionally managed investment options have the potential to dramatically reshape retirement savings outcomes for these participants.

Single-fund holdersAgain, because of the growing use of target-date funds and automatic enrollment, the percentage of single-fund holders—participants with their entire balance invested in a single plan option—has grown in recent years (Figure 68). Thirty-seven percent of Vanguard participants were invested in a single fund as of 2010. More than half of these participants were invested in a single target-date fund and 16% were invested in either traditional balanced funds or target-risk funds.

Since 2004, the percentage of single-fund investors holding cash investments has declined from 43% to 18%, while the percentage of single-fund investors investing in target-date or other balanced strategies has grown to 69%. This shift reflects several factors: the introduction of target-date funds by sponsors as a way to simplify participant decision-making; the rising use of automatic enrollment; and the designation of QDIAs under the PPA.


Figure 68. Single-fund holders


2004 2005 2006 2007 2008 2009 2010

Percentage of participants holding a single fund 25% 27% 28% 30% 34% 35% 37%

Percentage of single-fund participants using

Cash 43% 42% 41% 33% 27% 23% 18%

Bond funds 3 3 2 2 2 2 1

Traditional balanced funds 9 8 9 8 6 6 5

Target-risk funds 15 15 15 16 14 13 11

Target-date funds 1 6 13 25 39 45 53

Diversified equity funds 19 16 15 12 9 8 7

Company stock 10 10 5 4 3 3 5


7%

7%

2%

6%

9%

4%

7%

12%

8%

7%

17%

13%

7%

22%

16%

6%

3%

25%

20%

6%

3%

29%

Participants with professionally managed allocations


Figure 67.


Using a managed account programHolding a single target-date fund Holding a single target-risk or traditional balanced fund

20090

35%

20102004 2005 2006 2007 2008

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Other investment features

Investment menus are being reshaped by a variety of developments, including a growing use of index options, the choice of a default fund, and the use of advice services.

Index coreThere is increased interest among plan sponsors and consultants in offering a passive (or index) “core” within a plan investment menu. A passive core is a comprehensive set of low-cost index options that span the global capital markets. At a minimum, a passive core in our definition consists of four options covering U.S. equities, non-U.S. equities, U.S. taxable bonds, and cash. A passive core of these four options

represents a low-cost way for participants to obtain exceptional levels of diversification and varying levels of risk exposure.

In 2010, 40% of Vanguard plans offered at least four options within a passive core (Figure 69). Because larger plans have been quicker to offer this approach, about half of all Vanguard participants were offered a passive core in 2010. In addition, many of these plans also offer a passive target-date fund to further simplify participant portfolio construction. One-third of plans offer both a passive core and target-date funds, and 4 in 10 participants have access to these fund lineups. Just five years ago, about one-quarter of plans offered a passive core and less than 10% offered both a passive core and target-date funds (Figure 70).


Figure 69. Index core offered, 2010



All <1,000 1,000–4,999 5,000+

Percentage of plans offering an index core 40% 39% 42% 51%

Percentage of plans offering an index core and target-date funds 32 30 36 45

Percentage of participants offered an index core 48 38 43 51

Percentage of participants offered an index core and target-date funds 42 32 37 47

An index core includes broadly diversified index funds for U.S. stocks, U.S. bonds, and international stocks. At a minimum, the definition includes index funds for large-cap U.S. stocks, intermediate- or long-term bonds, and developed markets.


Figure 70. Index core offered trend


2004 2005 2006 2007 2008 2009 2010

Percentage of plans offering an index core 24% 28% 31% 33% 36% 38% 40%

Percentage of plans offering an index core and target-date funds 3 9 14 19 25 29 32

Percentage of participants offered an index core 30 34 35 36 41 42 48

Percentage of participants offered an index core and target-date funds 5 9 16 25 33 35 42

An index core includes broadly diversified index funds for U.S. stocks, U.S. bonds, and international stocks. At a minimum, the definition includes index funds for large-cap U.S. stocks, intermediate- or long-term bonds, and developed markets.


Default fundsIncreasingly, participants are being directed into default investments selected by the plan sponsor, rather than making active investment choices on their own. Default investing is rising in importance in response to concerns about the lack of investment knowledge among many plan participants, as well as the growing use of automatic enrollment. In response to these developments, the U.S. Department of Labor (DOL), acting under the PPA, authorized three types of default investments as eligible for special fiduciary protection. These options, known as QDIAs, include target-date funds, other balanced funds, and managed account advisory services.

Among Vanguard plans, 75% had selected a target-date or balanced fund option as a default in 2010 (Figure 71). Sixty-one percent of plans had specifically designated a QDIA under the DOL’s regulations. Typically, these were plans with automatic enrollment or employer contributions other than a match. Among these plans, 89% of designated QDIAs were target-date options and 11% were balanced funds. Less than 1% of plans selected a managed account advisory service as a QDIA.


Figure 71. Default fund designations in 2010


Non- QDIA QDIA All plans plans plans

Among all plans

Target-date fund 54% 9% 63%

Balanced fund 7 5 12

Money market or stable value 20 20

Total plans designating default 61% 34% 95%

Among plans designating a QDIA

Target-date fund 89%

Balanced fund 11

Total plans designating QDIA 100%


AdviceVanguard research shows that many participants in defined contribution plans lack the financial planning skills, time, or interest to make appropriate investment decisions. To address participants’ need for assistance with investment decisions, Vanguard offers a range of advice programs, including an online advice service, Personal Online Advisor; a managed account advisory service, Vanguard Managed Account Program; and Vanguard Financial Planning Services. The online advice service and managed account program are provided by Financial Engines, a third-party advisor; the financial planning services are provided by Vanguard Advisers, Inc. Each of these programs allows participants to include information about assets they have outside the plan, which may affect the selection of in-plan investments.

Online advice is targeted toward participants who are actively engaged and want to manage their investments themselves. Three in 10 plans offer online advice which assists participants in developing and managing optimal portfolios and continues to recommend portfolio changes over time (Figure 72). Because large plans are more likely to offer advice, 6 in 10 participants have access to the online advice service.

Managed account advice is targeted toward participants who prefer professional investment management. The managed account program provides professional management that includes development of customized portfolios using the funds offered in the plans, and ongoing monitoring and rebalancing. One in 8 plans offers managed account advice—and again, because larger plans are more likely to offer advice, 4 in 10 participants have access to the service.

Financial planning services are offered to all participants with plan sponsor authorization, but a fee may apply. However, the service is available at no charge to participants age 55 and older who are in or nearing retirement if their plan sponsor authorizes the offer. About half of plans offer this service to their participants, so about half of participants in this age group have access to the program.

Overall, 15% of participants who were offered one of these advice programs have used one of the programs. Participants were most likely to adopt the managed account program.



Figure 72. Use of advice services, 2010



All <1,000 1,000–4,999 5,000+

Online advice

Percentage of plans offering online advice 31% 22% 54% 63%

Percentage of participants offered online advice 64 32 57 73

Percentage of participants offered online advice accessing 5 7 5 5

Managed account advice

Percentage of plans offering managed account advice 13% 6% 31% 38%

Percentage of participants offered managed account advice 41 11 34 49

Percentage of participants offered managed account advice accessing 7 7 6 7

Financial planning services

Percentage of plans offering financial planning services to age 55+ participants 51% 48% 57% 57%

Percentage of participants age 55+ offered financial planning services 51 56 58 46

Percentage of participants age 55+ offered financial planning services accessing 3 3 3 3


Investment returns

In this section we present two return measures: total and personalized returns. Total rates of return reflect time-weighted investment performance and allow comparison of results to benchmark indexes. Personal rates of return are dollar-weighted returns, reflecting account investment performance adjusted for each participant’s unique pattern of contributions, exchanges, and withdrawals. They are not directly comparable to time-weighted performance data for market indexes or mutual funds. Both return measures are influenced by market conditions; however, only total rates of return can be compared with published benchmark indexes.

Participant returnsReflecting the equity market continuing recovery in 2010, median total and personal returns for DC participants were positive across one-, three- and five-year periods for the period ended December 31, 2010 (Figure 73). The median one-year total return was 12.3%; the five-year return was 3.7%.

Distribution of returnsAs of December 2010, five-year personalized returns were positive for about 95% of Vanguard DC plan participants (Figure 74). There was wide variation in returns among participants (Figure 75). Participants at the fifth percentile had five-year personalized returns of 0% in 2010. At the other extreme, participants above the 95th percentile had five-year personalized returns greater than 8%. The variation in returns is largely due to the variation in participant asset allocations and their individual account holdings.

Plan-level total return rates have less variation. In 2010, virtually all plans had five-year total returns between 1% and 10% (Figure 76).


12.3%

0.1%

3.7%

13.1%

2.4%

4.1%

Ave

rage

rat

es o

f re

turn

for

the

perio

ds s

how

n (a

nnua

lized

)

Participant rates of return, December 2010


Figure 73.

0

14%

Total return rate Personal return rate

1 year 3 years 5 years

Market returns ended December 31, 2010 1 year 3 years 5 years

60/40 Balanced* 12.8% 1.7% 5.0%

70/30 Balanced* 13.7 0.8 4.7

S&P 500 15.1 –2.9 2.3

Barclays US Aggregate 6.5 5.9 5.8

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

* Balanced composites based on S&P 500 and Barclays US Aggregate Indexes for periods and percentages shown; rebalanced monthly.


5%

75%

17%

3% 0%

4%

65%

28%

2% 1%

11%–20%<0% 0%–5% 6%–10% >20%

Distribution of 5-year returns, December 2005–December 2010


Figure 74.

0

80%

Perc

enta

ge o

f in

vest

ors

earn

ing

retu

rn in

sta

ted

rang

es




How to read a box and whisker chart:

This box and whisker chart shows the range of outcomes. Plot values represent the 95th,

75th, 50th, 25th, and 5th percentile values. The average value is represented by a white +

and the median value by a white line. An example of how to interpret the data in Figure 75

is: For the 1-year period, 5% of participants had total rates of return (TRR) greater than 21%;

25% had TRRs greater than 15%; half had TRRs greater than 13%; 75% had TRRs greater

than 10%; 95% had TRRs greater than 1%; and 5% had TRRs less than 1%. The average

1-year TRR was 12%.

+

75th percentile

50th percentile (median)+ average

25th percentile

95th percentile

5th percentile

Note: Based on 2.4 million observations for 1 year; 1.7 million for 3 years; and 1.2 million for 5 years.



–10

25%


1 year 3 years 5 years

Variation in participant personal and total return rates, 2010

Figure 75.

10%

–2%

3%

21%

6%

8%

12%

0%

4%

13%

0%

4%

1%

–5%

0%

15%

2%

5%

0

10%

0%

3%

23%

11%

8%

13%

2%

4%

14%

2%

4%

2%

–4%

0%

16%

5% 5%

+

+

+ +

+

+

0%

<0%

72%

1%–5%

27%

6%–10% >10%

1%

Variation in plan-level 5-yeartotal return rates, 2010


Figure 76.

100%

Plan total returns

Note: Based on 1,700 observations.


Perc

enta

ge o

f pl

ans

0

Exchange activity

An exchange is the movement of existing account assets from one plan investment option to another. This transaction is distinct from a contribution allocation decision, in which participants decide how future contributions to the plan should be invested. Exchange activity is a proxy for a participant’s holding period for investments, as well as a measure of the participant’s willingness to change their portfolio in response to short-term market volatility.

Exchange provisionsDaily exchanges are nearly universal for Vanguard DC plans, with virtually all plan sponsors allowing them. They are made possible by the daily valuation of plan investment assets, which all Vanguard clients offer and which is the norm in the DC recordkeeping industry. Vanguard and other investment companies serving DC plans typically have “round-trip” restrictions designed to thwart the minority of individual participants who seek to engage in active market-timing or day-trading.

Volume of exchangesDespite the ongoing market volatility of 2010, only 12% of participants made one or more portfolio trades or exchanges during the year, down from 16% in 2008 (Figure 77).9 As in prior years, most participants did not

trade. Not only did participant trading activity return to lower levels during 2010, but trading activity in both 2008 and 2009 was lower than the trading activity during 2004–2005, when markets were more benign.

Another measure of trading is the volume of dollars traded. We measure dollar volume movements as a fraction of total recordkeeping assets in order to scale them to growth in assets and growth in the underlying recordkeeping business. In effect, the fraction of assets traded is a measure of portfolio turnover. In 2010, traders exchanged the dollar equivalent of about 13% of average DC recordkeeping assets at Vanguard, in line with average assets traded in 2005–2007. On a net basis, 1% of assets were shifted from equities to fixed income in 2010, compared with about a 4% shift in 2008.

Over the past decade, dollar-trading levels have generally declined, especially from the peak “high churn” years earlier this decade (Figure 78). During this period, a series of rules designed to discourage frequent trading were implemented among recordkeepers and investment managers.10 Since the adoption of these restrictions, the most notable spikes in dollars traded occurred in the months of January 2008, September 2008, October 2008, and March 2009—periods of exceptionally high market volatility.

9 Our trading statistics are generally adjusted for sponsor-initiated trading—e.g., replacement of one plan option with another. On the date the option is eliminated and the balances are moved to a different fund, we are able to capture and adjust for the fund replacement effect. However, some participants initiate exchanges either before or after the fund is eliminated. We are not able to isolate this participant activity, but estimate that it could account for up to one-third of the trading activity.

10 The rules included 90- and then 60-day limits on round-trip trades and redemption fees on international funds designed to discourage international arbitrage.



Figure 77. Participant trading summary


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Percentage of participants trading 14% 15% 14% 20% 19% 14% 15% 16% 13% 12%

Percentage of average recordkeeping assets

Percentage traded 22.4% 18.9% 16.5% 14.6% 13.0% 12.7% 14.7% 16.6% 14.1% 13.4%

Percentage moved to equities (fixed income) (2.4) (2.7) 0.4 (0.2) (0.7) (0.6) (1.5) (3.9) (0.6) (1.1)

Dollar flows (in billions)

Dollars traded $26.4 $22.3 $21.0 $22.5 $23.6 $27.0 $36.2 $39.7 $29.0 $32.5

Dollars moved to equities (fixed income) (2.8) (3.2) 0.5 (0.3) (1.3) (1.3) (3.7) (9.3) (1.2) (2.8)

S&P 500 Index volatility

Percentage of days up or down 3% or more 3.2% 6.7% 1.6% 0.0% 0.0% 0.0% 0.4% 16.8% 8.7% 3.2%

Percentage of days up or down 1% or more 42 50 33 16 12 12 26 54 46 30


Trading activity, January 2001–December 2010


Figure 78.

0.0

3.5%

Dol

lars

tra

ded

as p

erce

ntag

eof

mon

th-e

nd a

sset

s

April 25, 2003:90-day limit

September 30, 2005:60-day round-trip rule

December 30, 2005:International redemptionfees in DC plans


Dollars traded as percentage of assets

20102004 2006 2007 2008 20092005200320022001

Direction of money movementSummary statistics may sometimes give the misleading impression that all participant trading is in one particular direction. However, in any given month, participants who trade are trading meaningful dollar amounts both into and out of equities (Figure 79). Even in volatile markets, as some traders shift their portfolios toward fixed income assets, there are others who shift toward equities.

During the past decade, which has encompassed two severe bear markets and provided investors with negative returns for the period, the net movement of money among traders has been generally toward fixed income investments. Nonetheless, even at the height of the recent market volatility, there were significant gross flows toward equities among some participants.

Types of trading activityAmong participants trading, the types of changes are varied. It is not true, for example, that most participants trading in volatile markets are “selling out” of equities. Among all Vanguard participants, only 1% of participants abandoned equities entirely during 2010 (Figure 80).11 The remaining 11% of participants who traded engaged in a variety of other

portfolio changes. For example, at one extreme, 2% of all participants reduced their equity exposure by more than 10 percentage points (but not to zero), while at the other extreme, 1% of all participants shifted to an all-equity portfolio.

Over a longer timeframe, 2007–2010, only 27% of participants traded, which means about three-quarters made no trades in their workplace retirement plan account (Figure 81). Despite volatile market and economic conditions, what is perhaps remarkable is that only 3% of all participants abandoned equities. The other 24% of all participants who traded made small changes to their portfolios. For example, 11% of all participants shifted their equity allocations by only 10 percentage points or less.

These findings confirm that participant trading behavior is quite heterogeneous. In any given month, trading dollars do not flow in a single direction; participants are moving money into and out of equities, even in periods of extraordinary stock market volatility. Also, it seems that an increase in market volatility triggers a small group of participants—those trading—to reconsider their risk exposure. Most are making changes to their risk profile, either raising or lowering equity exposure, but not eliminating it. Only a small fraction of participants chooses to abandon equity holdings altogether.

11 A participant who abandoned equities is one who shifted his or her entire portfolio into fixed income investments during the year. Only participants with some equity exposure in their portfolio who shifted to all fixed income assets during 2009 are included in this category.



Participant trading decisions, 2010Figure 80.


88% Nontraders

1% Abandoned equities

11% All other traders

Categories Participants Traders

Nontrader 88% n/a

Traded to 100% fixed income 1 6%

Decreased equities by more than 10 percentage points 2 16

Rebalancer shifted allocation by less than 10 percentage points 6 54

Frequent trader 0 4

Increased equities by 10 percentage points or more 2 17

Traded to 100% equities 1 3

Total 100% 100%


Participant trading decisions, December 2007–December 2010

Figure 81.


73% Nontraders

3% Abandoned equities

24% All other traders

Categories Participants Traders

Nontrader 73% n/a

Traded to 100% fixed income 3 11%

Decreased equities by more than 10 percentage points 5 21

Rebalancer shifted allocation by less than 10 percentage points 11 41

Frequent trader 3 10

Increased equities by 10 percentage points or more 4 14

Traded to 100% equities 1 3

Total 100% 100%


Ass

ets

trad

ed a

s a

perc

enta

geof

ave

rage

ass

ets

Net flow

Gross movement into fixed income

Direction of money movement, January 2001–December 2010


Figure 79.


0

3%

–3%20102001 2002 2003 2004 2005 2006 2007 2008 2009

Gross movement into equities

3 Accessing plan assets

Participants can access their plan assets by taking a loan or withdrawal while they are working or through a withdrawal or rollover when they change jobs or retire.

Plan loans

If permitted by the plan, participants can borrow up to 50% of their balance (up to a maximum of $50,000) from their DC plan account. Loans are more common for plans accepting employee contributions and less common for employer-funded DC plans, such as money purchase or profit-sharing plans. Plan loans allow DC participants to access their plan savings before retirement without incurring income taxes or tax penalties.

Loans do appear to have a beneficial effect on retirement savings. They appear to encourage plan participation among newly eligible employees, and their availability is estimated to raise contribution rates. Yet they also come with risks. Cash that has been borrowed earns fixed income rather than equity market returns. Also, participants who leave their employer must typically repay any loan balance immediately or risk paying taxes and a penalty.

Loan availabilityLoans are widely offered by employee-contributory DC plans. In 2010, 75% of Vanguard 401(k) plans permitted participants to borrow from their plan. The availability of loans tends to depend on plan size. Large plans tend to offer loans; small plans often do not. Loans are expensive to administer, and loan origination and maintenance fees are increasing. With loan fees, sponsors can allocate costs directly to those participants incurring loan-related expenses.

Most plans allow participants to have only one loan outstanding. In 2010, 55% of Vanguard 401(k) plans offering loans permitted only one loan at a time. Thirty-four percent of plans allowed two, and 11% of plans allowed three or more.

Loan use by participant demographicsFewer than 1 in 5 participants had a loan outstanding at year-end 2010 (Figure 82). On average, the outstanding loan account balance equaled 13% of the participant’s account balance excluding the loan, and the average participant had borrowed about $9,000 (Figure 83). Outstanding loans are typically excluded from measures of plan and participant assets because these assets have, in effect, been withdrawn from the plan and are not currently available as a retirement resource. Only about 2% of aggregate plan assets were borrowed by participants.12

Loans are sometimes criticized as a form of revolving credit for younger, lower-income workers. While that may be partly true, loans are used at somewhat higher rates by participants in their prime working years. Among workers age 35–54, loan use averaged about 20% in 2010. Overall, men and women use loans at the same rate.

Income appears to have a larger influence on loan use than age does. In 2010, 23% of participants with household incomes of less than $30,000 had a loan, while only 12% of participants with household incomes of more than $100,000 did.

12 Our analysis of the percentage of participants with loans considers all participants with an account balance in plans offering loans. Some of these participants no longer work for the plan sponsor and are not eligible for a loan. Loan use would likely be about 5 percentage points higher if based solely on active employees.

74 > Accessing plan assets

Participant loan use, 2010Figure 82.


82% 0 loans

14% 1 loan

3% 2 loans

1% 3 or more loans


Accessing plan assets > 75

Chart 83. Participant loan demographics, 2010

Vanguard defined contribution plans offering loans

Participants Participants with loans with no loans

Percentage of Percentage of Average Average Total average Average participants account balance loan account account balance account with loans in loan amount balance including loans balance

All 18% 13% $8,983 $67,428 $76,411 $85,977

Household income

<$30,000 23% 16% $6,565 $41,157 $47,722 $52,886

$30,000–$49,999 23 16 6,951 44,455 51,406 54,152

$50,000–$74,999 21 15 8,505 58,113 66,618 70,346

$75,000–$99,999 17 13 10,459 80,643 91,102 95,318

>$100,000 12 11 12,969 122,159 135,128 143,773

Age

<25 6% 26% $2,449 $9,292 $11,741 $3,913

25–34 15 25 5,228 21,232 26,460 21,641

35–44 21 19 8,439 44,947 53,386 55,191

45–54 21 12 10,484 86,164 96,648 105,522

55–64 15 9 10,948 118,445 129,393 152,450

>65 4 8 9,834 117,531 127,365 166,920

Gender

Male 18% 12% $9,727 $79,221 $88,948 $103,606

Female 18 15 7,873 50,865 58,738 64,056

Job tenure (years)

0–1 3% 24% $5,759 $24,432 $30,191 $11,706

2–3 11 24 4,606 19,014 23,620 25,525

4–6 17 22 6,007 26,824 32,831 46,148

7–9 21 20 7,914 39,942 47,856 73,138

>10 25 11 11,006 96,132 107,138 169,280

Account balance

<$10,000 13% 45% $2,421 $5,421 $7,842 $3,316

$10,000–$24,999 23 32 5,423 16,718 22,141 16,637

$25,000–$49,999 23 26 9,392 36,034 45,426 36,228

$50,000–$99,999 20 18 12,955 71,100 84,055 71,990

$100,000–$249,999 16 10 15,958 154,219 170,177 158,402

>$250,000 11 4 18,401 428,010 446,411 489,027


Loan use is highest among participants who earn less than $30,000—almost 1 in 4 of these participants has a loan outstanding. However, earlier in this report, we noted that participation rates are lowest among this group, with only 50% of these workers joining their plan. Arguably, participants who earn less than $30,000 but have borrowed from their retirement savings (12% of all workers) are better off than those employees who earn less than $30,000 and do not participate in their employer plan (Figure 84).

In 2010, loans were most common among participants with a balance between $10,000 and $100,000. Participants with account balances of less than $10,000 were actually somewhat less likely to have a loan, yet they borrowed the largest percentage of their balances. Only 13% of participants in this group had a loan, but the loan accounted for 45% of their account balance, on average.

Overall, across many demographic groups, participants with no loans outstanding in 2010 appear to have accumulated more in retirement savings than participants with loans.

Loan use by industry groupLoan use varies significantly by industry group (Figure 85). Participants in the education and health fields, as well as those in the business, professional, and nonprofit industries, use loans at a lower rate than other participants, suggesting that more highly educated participants might use loans less frequently.

Trends in loan issuanceAmong Vanguard plans, the number of participants taking loans from their DC plans fell during the 2004–2008 period. However, in 2009, the number of participants taking loans rose by 19%, returning to 2006 levels (Figure 86). In 2010, the number of participants taking loans rose again by 14%, returning to 2005 levels but still remaining below 2003–2004 levels.

There is a pronounced seasonality to loan-taking, with loan numbers typically peaking in the summer months. The reasons for this pattern, as well as the reasons for the decline and then rise in loan use, are not well understood. We speculate that loan use first fell with the overall decline in consumer spending and borrowing in the economic downturn, along with the decline in housing transactions (loans are often used for housing-related expenses). Loan use may have jumped sharply in 2009 and 2010 as the recession lengthened and households experienced additional financial shocks.


Participation and loans, 2010Figure 84.

All employees earning less than $30,000

50% Nonparticipants

12% Participants with a loan

38% Participants without loans



Chart 85. Participant loans by industry sector, 2010

Vanguard defined contribution plans offering loans

Participants Participants with loans with no loans

Percentage of Percentage of Average Average Total average Average participants account balance loan account account balance account with loans in loan amount balance including loans balance

All 18% 13% $8,983 $67,428 $76,411 $85,977

Industry group

Transportation, utilities, and communications 23% 14% $8,077 $57,530 $65,607 $76,318

Agriculture, mining, and construction 21 9 13,330 143,821 157,151 201,848

Finance, insurance, and real estate 20 17 9,545 56,261 65,806 80,353

Manufacturing 20 13 8,490 64,528 73,018 87,415

Wholesale and retail trade 18 14 7,402 54,389 61,791 58,833

Media, entertainment, and leisure 14 16 8,673 55,657 64,330 66,356

Education and health 12 17 7,484 43,386 50,870 53,388

Business, professional, and nonprofit 11 13 10,239 80,361 90,600 89,613


Participant loan trends

Active participants in Vanguard defined contribution plans offering loans

Mon

thly

loan

s is

sued

per

1,

000

activ

e pa

rtic

ipan

ts

Figure 86.

0

20

2003 2004 2005 2006 2007 2008 2009 2010

2003 2004 2005 2006 2007 2008 2009 2010

Monthly average (per 1,000 participants) 11.9 12.1 11.3 10.6 9.8 8.5 10.1 11.5

Annual increase (decrease) in loans issued per 1,000 participants 2% (6%) (7%) (7%) (14%) 19% 14%


Plan withdrawals

Plan withdrawals allow participants to gain access to their plan savings before a job change or retirement. Withdrawals are optional plan provisions and availability varies from plan to plan. They can be classified into two categories: Hardship withdrawals allow participants to access a portion of their savings when they have a demonstrated financial hardship, such as receipt of an eviction or home foreclosure notice. Nonhardship withdrawals include both post-age-59½ withdrawals and other withdrawals. Post-age-59½ withdrawals allow participants age 59½ and older to access their savings while they are working and are exempt from the 10% penalty on premature distributions. Some plans may also allow participants to withdraw employer profit-sharing contributions, after-tax contributions, or rollover assets while they are working.

Among all Vanguard DC plans, 81% allowed hardship withdrawals and plan withdrawals for those who have reached age 59½ (Figure 87). More than three-quarters of plans offer paperless processing for plan withdrawals.

In 2010, 4% of Vanguard participants in plans offering any type of withdrawal used the feature (Figure 88). About half were for hardship and half for nonhardship reasons. Assets withdrawn totaled 1% of Vanguard recordkeeping assets. This level of use has been

relatively unchanged since 2000. However, about 4 in 10 of these participants have taken plan withdrawals in each of the past two years, and 1 in 10 has taken a plan withdrawal in each of the past five years. For participants taking withdrawals, the withdrawal averaged more than one-quarter of their account balances.

Certain plans allow active participants to take withdrawals unrelated to hardships, such as post-age-59½ in-service or other withdrawals. These withdrawals also have a seasonal pattern and often spike in the first quarter of the year (Figure 89). One possible explanation is that some plan sponsors permit participants to take annual profit-sharing contributions in cash from the plan. Nonhardship withdrawals spiked by 20% in 2009—rising not only in the first quarter, but throughout the year. Nonhardship withdrawals grew by another 11% in 2010.

Hardship withdrawals were up 9% in 2009—and did not increase further in 2010. Only about 2% of participants took a hardship withdrawal. One of the reasons a participant can take a hardship withdrawal is to avoid foreclosure on a home. We speculate that the recent surge in foreclosures is in part driving this increase. Overall, 4% of participants took a nonhardship and/or a hardship withdrawal in 2010.


Figure 87. Plans offering withdrawals, 2010


Percentage of plans offering

2010

Hardship withdrawals 81%

Withdrawals after age 59½ 81

Paperless processing 77


Figure 88. Use of all plan withdrawals, 2010


2010

Percentage of participants using 4%

Percentage of assets withdrawn 1

Percentage of participant account assets withdrawn 30


Plan withdrawals are used infrequently. However, some participants could jeopardize their retirement program if they continue to rely on this feature throughout their working careers.

Plan distributions and rollovers

When changing jobs or retiring, DC plan participants have the choice of preserving their savings for retirement (by retaining them in the plan or rolling them over to an IRA or another DC plan) or taking a cash lump sum (and presumably spending it). If they choose to roll over their savings to an IRA or another qualified retirement plan, participants avoid paying taxes

on the accumulated balance. If participants spend the lump-sum distribution or invest it in a taxable account, they incur taxes (and a 10% penalty if they are younger than 59½).

The spending of plan savings before retirement— the problem of leakage from the retirement system—is a concern for the future retirement security of plan participants. In the short run, participants incur taxes and possible penalties on any amounts they spend. In the long run, because of the lost opportunity for compound earnings, they significantly increase the amount they need to save during the remainder of their working years.


Participant plan withdrawal trends

Active participants in Vanguard defined contribution plans offering in-service withdrawals

Mon

thly

with

draw

als

issu

ed

per

1,00

0 ac

tive

part

icip

ants

Figure 89.

0

10

Nonhardship withdrawal Hardship withdrawal

2004 2005 2006 2007 2008 2009 2010

Average per 1,000 active participants 2005 2006 2007 2008 2009 2010

Nonhardship withdrawals 3.6 3.9 4.1 4.2 5.0 5.6

Hardship withdrawals 1.5 1.7 1.8 2.0 2.2 2.2

Annual increase (decrease) per 1,000 active participants

Nonhardship withdrawals 2% 10% 5% 1% 20% 11%

Hardship withdrawals 1% 16% 9% 8% 9% 0%


Policymakers have attempted to discourage leakage in several ways. Generally, participants may keep their plan savings in their employer’s plan if their account balance is more than $5,000. Also, plan distributions between $1,000 and $5,000 are generally rolled over automatically to an IRA, unless the participant elects otherwise. In some cases, the sponsor may allow participants to retain a balance of $1,000 or more in the plan.

Participant and asset flowsPlan distributions can occur reasonably frequently as participants change jobs or retire, and they represent a large portion of total plan and participant assets.

In 2010, 8% of participants left their employer and were eligible for a distribution. Their assets totaled approximately 6% of Vanguard recordkeeping assets.

In 2010, 70% of participants terminating employment preserved their assets and 30% took a cash distribution (Figure 90). However, more than 90% of the assets available for distribution were preserved for retirement because they were either retained in the prior employer’s plan, were rolled over to an IRA, or rolled over to a new employer’s plan.

At the same time, there was a small increase in the percentage of participants choosing to take cash and presumably spending their savings—up from 29% in 2007 to 30% in 2010 (Figure 91). Given the ongoing uncertainties in the employment market, we anticipate an increase in cash-outs in the near term, under the assumption that plan savings are sometimes used as a personal form of unemployment insurance.


0%

2%

28%

22%

48%

0%

2%

6%

37%

55%

Percentage of participants Percentage of assets

0% 60%

Remain in plan

Rollover

Installment payments

Cash lump sum

Rollover and cash

Remain in plan

Rollover

Installment payments

Cash lump sum

Rollover and cash

Plan distributions, 2010


Figure 90.


Participants with termination dates in 2010

These figures differ from other reported statistics on plan distributions because they include participants who choose to retain their assets in their prior employer’s plan when they change jobs or retire. If we analyzed only those participants who took a distribution from their plan, then more took a cash lump sum (30%) than rolled over their assets to another plan or IRA (22%). But in our view, a full assessment of plan distribution behavior must include participants who kept their assets within their prior employer’s plan at the time of a job change or retirement.

There has been meaningful improvement since 2000 in the percentage of participants choosing to preserve their plan assets for retirement. There has also been an increase in the percentage of participants choosing to remain in their former employer’s plan that was somewhat offset by a decrease in the percentage of participants choosing a rollover. Similar trends were evident in the assets available for distribution.


Figure 91. Trends in distribution of plan assets


Participants with termination dates in the given year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Percentage of participants choosing

Remain in plan 31% 36% 40% 45% 47% 47% 47% 48% 48% 48%

Rollover 29 27 25 24 24 24 24 21 21 22

Installment payments 1 1 1 1 0 0 0 0 0 0

Participants preserving assets 61% 64% 66% 70% 71% 71% 71% 69% 69% 70%

Cash lump sum 38% 35% 32% 29% 27% 27% 28% 30% 30% 28%

Rollover and cash 1 1 2 1 2 2 1 1 1 2

Percentage of assets available for distribution

Remain in plan 40% 46% 54% 55% 52% 53% 51% 50% 59% 55%

Rollover 50 44 37 37 39 39 42 42 33 37


Assets preserved for retirement 90% 90% 91% 92% 91% 92% 93% 92% 92% 92%

Cash lump sum 8% 8% 7% 6% 7% 6% 5% 6% 6% 6%




Figure 92. Plan distribution behavior by age, 2010



20s 30s 40s 50s 60s 70s Total


Remain in plan 49% 49% 48% 50% 42% 19% 48%

Rollover 14 17 20 26 37 36 22

Installment payments 0 0 0 0 1 12 0

Participants preserving assets 63% 66% 68% 76% 80% 67% 70%

Cash lump sum 36% 33% 30% 22% 18% 31% 28%

Rollover and cash 1 1 2 2 2 2 2


Remain in plan 64% 63% 60% 57% 47% 22% 55%

Rollover 19 24 30 36 48 68 37

Installment payments 0 0 0 0 0 1 0

Assets preserved for retirement 83% 87% 90% 93% 95% 91% 92%

Cash lump sum 15% 11% 8% 4% 3% 6% 6%

Rollover and cash 2 2 2 3 2 3 2


Plan distribution behavior by account balance, 2010


Figure 93.


0

100%


<$1,000 $1,000–$4,999

$5,000–$9,999

$50,000–$99,999

$10,000–$24,999

$25,000–$49,999

$250,000–$499,999

$500,000+$100,000–$249,999

Perc

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sets

44%

57% 62%

72%

80%

88% 94% 96% 94%

Account balance

Determinants of distribution behaviorAge has a significant impact on distribution behavior. Younger participants are more likely than older participants to spend, rather than save, their plan distributions. Yet most of the assets available for distribution are still preserved for retirement, even by younger individuals. In 2010, 37% of participants in their 20s chose to spend their plan assets, compared with 20% of participants in their 60s (Figure 92). But in terms of assets, 83% of assets owned by participants in their 20s and 95% of assets owned by participants in their 60s were preserved.

Account balances also have a significant impact on distribution behavior. Participants with smaller account balances are less likely to preserve their assets for retirement. Only 44% of participants with balances of less than $1,000 kept their balance in a tax-deferred account (Figure 93). However, once balances reach $25,000, more than 80% of participants choose to preserve their assets.

A more interesting picture emerges when you consider both age and account balance. At most asset levels, participants in their 20s are the most likely to preserve their assets (Figure 94). While participants in their 40s did overwhelmingly preserve their assets for retirement, at most asset levels they are slightly more likely than any other age group to cash out their DC plan when changing jobs.

Our analysis thus far reflects the behavior of individuals who terminated employment in a given year, either by changing jobs or retiring. But it is also true that participants who terminated in previous years retain the right to withdraw their plan assets from their prior employer’s plan at any time and roll over or spend the money.


Plan distribution behavior by age and account balance, 2010


Figure 94.

0

100%

Note: Cells with less than 100 data points are omitted.Source: Vanguard, 2011.


Perc

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20s 30s 40s 70s50s 60s

<$1,000 $1,000–$4,999

$5,000–$9,999

$50,000–$99,999

$10,000–$24,999

$25,000–$49,999

$250,000–$499,999

$500,000+$100,000–$249,999

Account balance

A more optimistic picture emerges if we analyze the total plan assets available for distribution at any given time. During 2010, about 30% of all Vanguard qualified plan participants could have taken their plan account as a cash distribution because they had separated from service in the current year or prior years. However, just 19% of participants eligible for a cash distribution took one, while the vast majority (81%) continued to preserve their plan assets for retirement (Figure 95). In terms of assets, 96% of all plan assets available for distribution were preserved—

either rolled over to an IRA or other qualified plan, or left in the former employer’s plan. Only 4% of assets were distributed in cash.

At the same time, there was a small increase in the percentage of participants choosing to take cash and presumably spending their savings—up from 17% in 2007 to 19% in 2010. As we noted previously, given the ongoing uncertainties in the employment market, we anticipate an increase in cash-outs in the near term, under the assumption that plan savings are sometimes used as a personal form of unemployment insurance.


Figure 95. Alternative view of distribution of plan assets


All terminated participants with access to plan savings in the given year

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


Remain in plan 53% 56% 60% 64% 65% 66% 65% 66% 67% 65%

Rollover 20 18 17 16 16 16 16 14 13 14


Participants preserving assets 75% 76% 79% 82% 83% 84% 83% 82% 82% 81%

Cash lump sum 24% 23% 20% 17% 16% 15% 16% 17% 17% 18%



Remain in plan 68% 70% 76% 76% 76% 75% 74% 72% 78% 75%

Rollover 26 24 19 20 20 21 22 23 17 20


Assets preserved for retirement 95% 95% 96% 97% 97% 97% 97% 96% 96% 96%

Cash lump sum 4% 4% 3% 2% 2% 2% 2% 3% 3% 3%



Access methods and the internet

Within DC plans, a variety of services have evolved to foster participant control over plan savings and facilitate investment decisions. Yet despite the availability of phone associates, voice-response systems, and internet access, most participants have very little or no interaction with their providers in a given year. Only a minority of participants are actively engaged in monitoring and managing their accounts. For this group, improved technology and near-universal internet access have dramatically accelerated the use of the internet as a service method.

Perhaps because of this minority of active decision-makers, use of the Vanguard retirement plan website continues to grow. During 2010, the internet remained the dominant access method for participants, again surpassing the use of phone associates.

Frequency of account accessIn 2010, 47% of plan participants never contacted Vanguard regarding their plan account (Figure 96), while 53% did—a ratio that was essentially unchanged from 2001, when half of plan participants never contacted Vanguard. For participants who did not contact Vanguard, their sole method for reviewing plan balances was quarterly account statements. These participants also received Vanguard’s participant newsletter and any education or communications program initiated by their employer.

About 3 in 10 participants contacted Vanguard infrequently. This group interacted with Vanguard between one and six times per year, whether through a phone associate, an automated voice-response system, or the internet. One-quarter of participants contacted Vanguard frequently. This group, using

all channels, contacted Vanguard at least monthly, if not two or three times a month or more. This level of contact may seem high, but keep in mind, for those using the internet, a brief logon to examine account balances or fund prices constitutes a unique contact event.

Account balances are a strong influence on contact behavior. The larger a participant’s balance, the more likely they are to be proactive in obtaining information about their Vanguard plan account. Participants with account balances of more than $100,000—about 20% of all Vanguard participants—contacted Vanguard at least monthly, if not more, compared with a median level of one contact per year for the entire participant population.


Participant contact frequency, 2010


Figure 96.

0

50%


Infrequent contactNo contact

Frequent contact

47%

0

9%

1

11%

2–3

8%

4–6

7%

7–12

6%

13–24

12%

25+

Types of account accessParticipants have three access channels at their disposal: toll-free phone calls to telephone associates, toll-free phone calls to an automated voice-response system, and the internet. When measured in terms of total participant use, the internet remained the most widely used channel in 2010—44% used the internet, compared with 20% who used telephone associates (Figure 97).

In terms of total contacts, the internet clearly dominates. Web interactions accounted for more than 90% of all participant contacts in 2010. Participants using this contact method averaged about 42 web interactions per year. Each distinct logon is counted as a unique contact event.

The portion of participants selecting the internet as an access channel has grown more than 200% since 2001 (Figure 98). During this interval, the portion of participants selecting a phone associate as an access channel has declined by about 20%, and the portion choosing the voice-response system has declined by about 80%. Given current trends, the dominance of the internet as a contact channel is likely to continue.

Participant registration for internet access to their DC plan account has fueled this growth. Sixty-four percent of participants were registered for the internet in 2010, about triple the level of internet registration in 2001 (Figure 99).

Participants are increasingly choosing the internet as the preferred access channel for transactions: 80% of all transactions were processed via the internet during 2010 (Figure 100). Moreover, 90% of all exchanges and contribution allocation changes occurred on the internet. Participants did, however, continue to process the majority of their withdrawal transactions through a phone associate in 2010.


2% 4%

94%

20%

9%

44%

2.3

8.0

41.9

Account access methods, 2010


Figure 97.

0 0

100%

Participant account access

50


Percentage of contactsPercentage of participants using

Mean number of contacts per participant

Telephone associate

Voice-response unit

Internet

Figure 98. Account access methods trend


Percentage of participants contacting Vanguard via . . .

2001 2010 Change

Voice, telephone associate, or internet 52% 53% 2%

Telephone associate 25 20 –20

Voice-response unit 42 9 –79

Internet 14 44 214

Participants registered for internet access 22% 64% 191%



Internet access trend


Figure 99.

0

70%


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egis

tere

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r in

tern

et a

ccou

nt a

cces

s

20102001 2002 2004 2005 20072006 2008 20092003

22%

30%

37%

44% 45% 49%

58% 59% 62%

64%

Voice-response unit

90% 10%

90% 10%

88% 10%

80% 17% 3%

68% 19% 13%

33% 64% 3%

74% 25%


Percentage of transactions processed by channel

Participant channel utilization, 2010Figure 100.


0% 100%

Enrollments

Exchanges

Contribution allocation changes

Payroll deferral rate changes

All transactions

Loans

Withdrawals

Telephone associateInternet

Index of figures Page

Market overview

S&P 500 daily close 7

How America Saves highlights 8

Part 1: Accumulating plan assets

Plan design

Automatic enrollment adoption 18

Automatic enrollment design by plan size 19

Automatic enrollment design trends 20

Eligibility 12

Employee contributions for maximum match: Average and median 16

Employee contributions for maximum match: Maximum value 16

Maximum pre-tax contribution limit 18

Other employer contributions: Average and median 17

Other employer contributions: Value 17

Promised matching contributions: Average and median 15

Promised matching contributions: Maximum value 15

Types of employer contributions 14

Types of matching contributions 14

Vesting 13

Participation rates

Aggregate participation rates 25

Distribution of participation rates 22

Participation rates 21

Participation rates by income and gender 24

Participation rates by industry sector 24

Participation rates by participant demographics 23

Participation rates by plan design 25

Participation rates by plan size 22

Deferral rates

After-tax participation rates by participant demographics 33

Aggregate employee and employer contribution rates 35

Aggregate participant and employer contribution rates 35

Catch-up contribution participation rates by participant demographics 32

Deferral rates 26

Deferral rates by income and gender 29

Deferral rates by industry sector 29

Deferral rates by participant demographics 28

Deferral rates by plan size 27

Distribution of aggregate participant and employer contribution rates 35

Distribution of deferral rates 27

Employee deferral rates by plan design 31

Participant deferral rates by plan design 30

Participants contributing the maximum 31

Roth participation rates by participant demographics 33

Account balances

Account balances by plan size 39

Account balances 36

Balances by industry sector 39

Balances by participant demographics 38

Change in account balances, continuous participants 37

Distribution of account balances 36

Part 2: Managing plan assets

Participant investment decisions

Asset allocation by industry sector 47

Asset allocation by participant demographics 45

Asset allocation by plan size 46

Current contribution allocation by plan entry date 48

Distribution of equity exposure 47

Distribution of equity exposure compared for target-date fund and non-target-date fund investors 59

Page

Number of investment options used 50

Participant contribution allocation summary 43

Participant trading decisions, 2010 71

Participant trading decisions, December 2007–December 2010 71

Participant trading summary 69

Participants with professionally managed allocations 61

Plan asset allocation summary 42

Single-fund holders 61

Trading activity, January 2001–December 2010 69

Use of international funds 55

Use of target-date funds 56

Use of target-date funds, participants 58

Plan investment options

Advice services, use 65

Average number of investment options offered and used 49

Company stock exposure for plans and participants 55

Default fund designations 63

Impact of company stock employer contributions on asset allocation 55

Index core offered trend 62

Index core offered 62

Number of investment options offered 50

Plan design and target-date funds 60

Trend in plan adoption of target-date and target-risk funds 57

Type of investment options offered and used 52

Type of investment options offered 51

Use of target-date funds, plans 57

Personal returns

Direction of money movement, January 2001–December 2010 71

Distribution of 5-year returns, December 2005–December 2010 66

Participant rates of return 66

Variation in participant total and personal return rates 67

Variation in plan-level 5-year total return rates 67

Part 3: Accessing plan assets

Loans

Participant loan demographics 75

Participant loan trends 77

Participant loan use 74

Participant loans by industry sector 77

Participation and loans 76

Withdrawals

Participant plan withdrawal trends 79

Plans offering withdrawals 78

Use of plan withdrawals 78

Plan distributions

Alternative view of distribution of plan assets 84

Plan distribution behavior by account balance 82

Plan distribution behavior by age and account balance 83

Plan distribution behavior by age 82

Plan distributions 80

Trends in distribution of plan assets 81

Access methods

Account access methods trend 86

Account access methods 86

Internet access trend 87

Participant channel utilization 87

Participant contact frequency 85

88 > Figure index

Methodology

The Vanguard data included in this report is drawn from several sources:

All defined contribution clients. This universe consists of more than 2,000 qualified plans, 1,700 clients, and more than 3 million participants for which Vanguard provides recordkeeping services. About 9 in 10 of these plans have a 401(k) or 403(b) employee-contributory feature; the other 1 in 10 is an employer-contributory DC plan, such as a profit-sharing or money purchase plan, in which investments are directed by participants. Unless otherwise noted, all references to “Vanguard” are to this universe, and all data is as of December 31, 2010.

Vanguard participation and deferral rates. Data on participation and deferral rates is drawn from a subset of Vanguard recordkeeping clients for whom we perform nondiscrimination testing. For the 2010 analysis, the subset is composed of plans that complete their testing by March and represents approximately half of the clients for whom we perform testing. For the 2010 analysis presented in this edition of How America Saves, this subset includes 550 plans and 1.1 million participants and eligible nonparticipants. Almost all of these plans are 401(k) or paired 401(k)/profit-sharing plans. Income data used in participation and deferral rate analyses also comes from this subset of plans.

When compliance testing has been completed for all plans, the analysis is performed again and the data is restated for prior years. The restated data for 2009 now includes 1,000 plans and 1.8 million participants and eligible nonparticipants. Plans that complete their testing by March generally have lower participation and deferral rates and generally include plans with concerns related to passing testing. Hence, the restated numbers generally show an improvement over the numbers initially reported.

Household income data. Household income data for asset allocation, account balance, and loan demographics is from an external source overlaid

onto Vanguard participant data. This external household income data covers approximately 85% of the Vanguard participant universe and is the most recent data available.

Industry benchmark data supplements to How America Saves

Industry benchmark data supplements to How America Saves are available for the following sectors:

• Ambulatory health care services firms

• Finance and insurance firms

• Information firms

• Legal services firms

• Manufacturing firms

• Mining, oil and gas extraction firms

• Technology firms

• Utility firms

If the sector you are interested in is not available at this time, please contact your sales executive or relationship manager.

Acknowledgments

We extend our thanks to the following Vanguard crew members who made this publication possible:

Data analysisJeffrey W. Clark John A. Lamancusa Daniel C. Proctor

Marketing & CommunicationsCorinne T. Dougherty Laurie E. Doyle John J. Friel Diane C. LeBold Wendy L. Phiel

AuthorsStephen P. Utkus Jean A. Young

Methodology > 89

All investing is subject to risk.

Financial Engines is a trademark of Financial Engines, Inc. Financial Engines Advisors LLC, a federally registered investment advisor and wholly owned subsidiary of Financial Engines, Inc., provides all advisory services. The Vanguard Group has partnered with Financial Engines to provide the Vanguard Managed Account Program and Personal Online Advisor, powered by Financial Engines. Financial Engines is an independent, registered investment advisor that does not sell investments or receive commission for the investments it recommends. All advisory services are provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor and an affiliate of The Vanguard Group, Inc. (Vanguard). Vanguard is owned by the Vanguard funds, which are distributed by Vanguard Marketing Corporation, a registered broker-dealer affiliated with VAI and Vanguard. Neither Vanguard nor Financial Engines guarantees future results.

Vanguard Financial Planning Services are provided by Vanguard Advisers, Inc., a registered investment advisor.

Vanguard research > Vanguard Center for Retirement Research Vanguard Investment Counseling & Research Vanguard Investment Strategy Group

E-mail > [email protected]

For more information about Vanguard funds, visit www.vanguard.com or call 800-523-1036 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

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P.O. Box 2900 Valley Forge, PA 19482-2600

© 2011 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

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