401(k) Plan Enrollment Hits Record as Automatic Sign-Ups Gain

Financial advisors see openings for ETFs despite mutual funds’ larger share.

Participation in 401(k) retirement savings plans inched up to a record 85% last year, as companies increasingly enroll employees automatically into plans, according to an annual Vanguard Group survey. 

Enrollment gained 1% since 2021, despite turmoil in markets last year that saw the SPDR S&P 500 ETF Trust (SPY) drop the most since the 2008 recession. Currently, 58% of Vanguard plans have automatic enrollment. 

More companies are automatically enrolling employees in savings plans since the 2006 passage of the Pension Protection Act, which boosted the amount of money workers can direct from paychecks into retirement plans, according to Vanguard’s How America Saves 2023. Still, one-fifth of participants need to boost their savings rate modestly to have enough for retirement, the survey found. 

“Plan participation rates have increased, automatic enrollment designs have become stronger, and participant portfolio construction has continued to improve with more age-appropriate asset mixes and less extreme equity allocations,” the survey said. 

Big investment advisors like Vanguard seek to make retirement investing easy by offering fewer options that don’t overwhelm investors, facilitating a “set it –and forget- t” practice that many long-term savers favor, Robin Giles, CFP, founder of Apex Wealth Management in Katy, Texas, told etf.com in an email. This may also give mutual funds a leg up over ETFs, she said. 

ETFs Making Further Inroads

“ETFs are still hard to find in most company retirement plans without a self-directed investment option,” Giles explained. “Mutual funds can be set up for auto-purchase based on a dollar amount, where ETFs are purchased based on a fluctuating share price.” 

Exchange-traded funds are making inroads thanks to low-cost, digital 401(k) plan vendors, such as Guideline, 401GO and the ShareBuilder Corporation’s Sharebuilder 401k, that offer the funds, said Amir Noor, CFP, director of financial planning at the United Financial Planning Group in New York City.  

“As those plans increase in popularity,” he added, “the average cost of 401(k) plans will go down significantly, creating a lot of savings for retirement.” 

Since 2013, the participation rate in 401(k) plans has gained seven percentage points, Vanguard said. 

The Malvern, Pennsylvania investment advisor, the second largest exchange-traded fund issuer, reported also that nearly a quarter of participants saved at least 10% of their income for retirement, with the average deferral rate coming in at a historic high of 7.4%. Vanguard polled five million Americans to produce its poll on savings, now in its twenty-second year. 

The Vanguard survey also reported that retirement plan features such as target-date funds as well as retirement fund savers adopting buy-and-hold strategies have helped investors weather the ups and downs of the market better, and have led to a decline in participant trading over the last 15 years. Last year, only 6% of participants traded. 

Follow Michelle Lodge on Twitter @lodgemich