Vanguard has just released their annual report – “How America Saves” – which is a review of the defined contribution plans that they administer. There are some very troubling statistics in this analysis.

The U.S. equity market, as measured by the S&P 500, has enjoyed a tremendous rally since the depths of the market correction that bottomed in March 2009 appreciating 9.1% per annum.  For the last 5 years through May 31st, the S&P 500 is up 13.0% annualized. Unfortunately, participants in the DC space don’t appear to have benefited to the same extent.

If one looks at those participants closest to retirement in the 55-64-year-old category, average balances have grown by only $22,000 ($190,000) since 2007, while median balances have actually fallen, and are currently only $71,100. Remember, Vanguard is catering to larger organizations, whose employees are likely better compensated while being provided more retirement education, yet account balances remain modest.

When looking at all workers who have a plan with Vanguard, the average balance has only grown by $11,000 since 2007, while the median balance has actually fallen by nearly $3,000 per participant. Some of the decline in the median account balance may reflect greater participation in plans as auto-enroll features ramped up. But, when factoring into the equation the millions of American workers who don’t have access to an employer-sponsored plan or those who don’t participate in their company’s plan, you can quickly see why there is a retirement crisis unfolding.

It is really silly to believe that an employee contributing 3% or 4% per annum will be able to create a retirement balance close to what they actually need to replace 60%-70% of their final income. What we are seeing is the creation of anemic account balances that need to be turned into an income stream to be used in conjunction with Social Security benefits. This combination isn’t likely to be nearly enough.