Retirement insights from a Colorado PERA perspective

Issues & Perspectives

How America Saves: Similarities and differences between retirement saving in the private sector and PERA

how america saves

Over time, private sector defined contribution (DC) plans seem to be increasingly mirroring some of the prominent features of public employee defined benefit (DB) plans. Several of the investment trends identified in a recently released report – shifting to professionally managed investment options, growth in automatic savings features, and high levels of savings – reflect provisions that are already in place through the PERA hybrid (DB) plan.

Recently, Vanguard, one of America’s largest private sector retirement plans, issued an updated version of its report, How America Saves 2018, based on their 2017 DC plan data. The report looks at trends in saving behavior of participants in Vanguard’s defined contribution (DC) retirement plans.

The report notes that DC plan participants continue the trend of shifting their savings to professionally managed investment options, signaling “a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”

In 2017, 58 percent of Vanguard participants had their entire account balance invested in a professionally managed option, including target date funds, target-risk or balanced funds, or a managed account advisory service.

Note that 100 percent of PERA DB plan participants enjoy professional management of their investments. As Vanguard pointed out, “Diversified, professionally managed investment portfolios dramatically improve portfolio diversification compared with participants making choices on their own.”

The Vanguard report also spotlights the growth of auto-enrollment features in retirement plans offered by private sector employers. At the end of 2017, 46 percent of Vanguard plans had automatic enrollment, and the adoption of auto-enrollment had grown by 300 percent since 2003.

Automatic enrollment is a key feature of PERA for Colorado’s public employees. Though some members have the option to choose either the hybrid DB plan or the PERA DC Plan (the defined contribution option), all employees working for PERA employers are automatically enrolled in a PERA retirement plan. Whether it’s the PERA DB or PERA DC, contributions are mandatory and cannot be used for purposes other than retirement while a member is employed by an employer that offers PERA.

Vanguard also called out the growth in retirement plan participation rates of employees, noting that plans with automatic enrollment have a 92 percent participation rate compared with a participation rate of just 57 percent for plans with voluntary enrollment for a total plan-weighted participation rate of 81 percent in 2017 (unchanged from 2016), again compared to PERA’s 100 percent participation.

PERA employees and employers also contribute to their retirement savings at a higher level than private sector participants in Vanguard’s plans.

While PERA members contributed 8 percent of income in 2017 (10 percent for State Troopers), the average employee-elective deferral rate for Vanguard was 6.8 percent in 2017, and the median deferral rate was 6 percent in 2017 – unchanged for as long as Vanguard has been tracking this statistic.

Senate Bill 18-200 will increase member contributions by 2 percent and employer contributions by 0.25 percent, except for Local Government employers, between 2019 and 2021. (Read more about Senate Bill 18-200.)

In 2017, the average account balance for Vanguard participants was $103,866; the median (half higher and half lower) balance was $26,331. At the end of 2017, PERA was paying benefits to more than 118,000 retired public employees and their beneficiaries who received an average benefit of $3,204 per month.

Defined benefitA mandatory retirement savings plan in which a participant’s future benefits are known or can be calculated, but contributions are subject to adjustments. Defined contributionA voluntary plan in which participants can save pre-tax income for retirement. Contributions are “defined” by the employee, but the future benefit is not guaranteed. DiversificationA strategy of reducing exposure to risk by combining a wide variety of investments within a portfolio.

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