The Vanguard Group, Inc. is the world’s largest investment management company and a major player in the 401(k) servicing market. Vanguard holds over $400 billion in defined contribution plan assets and provides services to approximately 1,700 companies with a 401(k) or other defined contribution plan. The company recently released a report entitled How America Saves 2010: A Report on Vanguard 2009 Defined Contribution Plan Data. With insight to investor behavior and investment trends, the report is useful to anyone who may want to know how their deferral amounts and their investment decisions compare to the industry averages.
This report is particularly interesting in light of the volatility of the U.S. equity markets from October 2007 through the end of 2009. The S&P 500 Index declined 57% from its peak to the bottom of the trough in March 2009. From the March 2009 low, the market subsequently rebounded 65%, but ended 2009 up 28%. In light of the volatility, how did this affect 401(k) investor behavior?
Despite the bumpy ride during those 27 months, investors have largely stayed the course. The 2009 plan participation rate was 75% for all eligible employees, down only 2% from 2008, and has basically remained unchanged since 2000. The median salary deferral rate in a 401(k) in 2009 was 5.9%, down slightly from the peak of 6.0% in 2007.
There was an increase in participation rates among lower-income, younger, and newly hired employees. Participants earning less than $30,000 had a participation rate of 52%, up 7% from 2007. The rate of participation from employees younger than 25 rose to 45% in 2009, up from 38% in 2007. Employees with incomes exceeding $100,000 had a participation rate of 89%.
Men and women participate at the same level. However, the averages fail to account for the income difference between the two. When looking at both genders by income, women are more likely than men to join their employer’s plan. For example, for employees with income between $30,000 to $49,999, 71% of women participated in their employer’s plan, while only 64% of men participated.
The media tends to convey a message that the market’s drop in 2008 has caused many investors to have to delay or even dismiss the notion of retirement. The data from this report would seem to contradict that notion. Vanguard examined the change in account balances for participants that had holdings from September 2007 through the end of 2009. Of this group, the median account balance rose by 10% during this period, reflecting the effects of both declining and then improving asset values and ongoing contributions. Only 6% of participants suffered declines of more than 30% in their account balances.
People still have faith in stocks. Only 1% of all participants completely abandoned stocks in their 401(k), moving their holdings to fixed income assets. Although new employee contributions allocated to equities declined 6% in 2009 relative to 2007, 74% of overall investments selections were in stocks.
Participation in a retirement plans tends to vary by industry. Agriculture, mining, and construction employees had the highest participation rate, with 9 out of 10 workers joining their employer’s plan. Employees in education and health fields have the lowest participation rate, at 58%.