Vanguard Upended This Major Retirement Myth With New Data

When Vanguard's How America Saves report came out, it shed some light on why the overall retirement savings rate has increased so much in recent years.

The data showed that the total savings rate for retirement plans increased by almost two full percentage points over the last decade. Not only that, the total participant contribution rate was 12.1%, reaching the 12% - 15% annual savings rate Vanguard recommends for retirement. Here's why the savings rate has increased in recent years.

Workers aren't the reason retirement savings are rising

New data has come out that retirement savings are on the rise. More people are contributing to their 401(k) accounts than ever before, and many think it's because workers have become more disciplined with their personal finances.

In reality, the reason retirement account participation is up is because of automatic enrollment. Recent laws from the Secure 2.0 Act mandated that employers automatically enroll their employees into new 401(k) plans. This has led to more people being enrolled when previously many may not have taken the steps to do so.

What the data says about automatic enrollment

According to Vanguard's 25th edition of How America Saves, 94% of workers who were enrolled in their 401(k) plans automatically participate. (Workers can always opt out once they are automatically enrolled.) Compare that to 64%, which is the percentage of workers who enrolled in their 401(k) plans voluntarily.

The reason automatic enrollment works so well is that it eliminates a lot of the barriers to signing up for 401(k) plans. Many people are intimidated by the idea of filling out paperwork, choosing a contribution percentage, and deciding what assets to invest in. People worry they're going to make the wrong choice or are unfamiliar with investing in general. Auto-enrollment handles all of those decisions, which in turn helps employees set up their retirement accounts for their future.

The number of employers using auto-enrollment is rising

Even though the SECURE 2.0 Act mandated that employers start auto-enrolling their employees into new 401(k) plans as of 2025, some employers are exempt. For example, new businesses, small businesses with 10 or less employees, and some church and governmental plans are exempt from auto-enrolling their employees. Additionally, auto-enrollment may take a while to implement. Some employers may take time before all employees are auto-enrolled. However, Vanguard reports that 61% of its plans now use auto-enrollment, up from 56% in 2021.

More workers have professionally managed allocations

Another change is that a record high percentage of 401(k) plan holders, 69%, are now invested in a professionally managed allocation. That means many people now have professionally managed investments, like target date funds.

Target-date funds automatically adjust to become more conservative as people get closer to retirement, which takes a lot of the guesswork that comes with managing a portfolio as you age. This also helps eliminate some portfolio mistakes people make, like holding too much company stock or investing too much in a single asset.

Overall, workers are saving more than ever before

It's significant that the combined savings rate (including both employee and employer contributions) reached a record 12.1%. Though the increase is due mostly to auto-enrollment features rather than to people being more motivated to save for retirement, it's still positive news. After all, building wealth takes consistent investing over a long period of time, and auto-enrollment saves people a step, which can help them reach their retirement goals.

How to check what features your 401(k) plans offer

If you're not sure what features your 401(k) plan offers, you can look through your 401(k) plan documentation, called a Summary Plan Description (SPD). This will list your employer's eligibility criteria, contribution limits, vesting schedules, and more. It will also let you know whether or not your employer's 401(k) plan offers other automatic features like regular contribution increases or an employer match, both of which can help your portfolio grow over time.

Consult with a financial advisor if you need help

Sometimes, contributing to retirement accounts can be confusing, and there's no shame in asking for help if you are unsure. After all, your retirement account is your key to a secure future during your golden years. So, contact your HR department or work with a financial advisor if you need help making sure you're on the right track for retirement.

Bottom line

Increasing your 401(k) contributions over time can hopefully help you achieve your retirement goals. Many employers now auto-enroll new employees in their 401(k) plans. However, it still helps to monitor your own accounts, manage your portfolio, and ask a financial advisor if you're unsure about your retirement readiness.