Over 20 years, better outcomes through retirement plan design

August 13, 2021

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Key trends shaping the retirement plan landscape are positively impacting participant outcomes. As documented in the 20th edition of How America Saves—the definitive look at Americans' retirement saving habits—these trends include increasingly more-appropriate asset allocations, rising participation rates, decreasing loan use, and an increasing use of financial advice.

Several factors are driving these trends, including plan sponsors' desire to ensure their participants are cared for both to and through retirement, regulatory changes, market forces, and an aging participant population. Understanding this enables us to better determine if these trends will continue and how we as an industry can respond.

What follows is a discussion about these trends and what they could mean for retirement plans going forward with David Stinnett, a principal who heads Vanguard Strategic Retirement Consulting (SRC), and Jeff Clark, the lead author of How America Saves 2021.

At the highest level, to what do we attribute improvements in retirement plan design?

David Stinnett: I think about it as the outcome of a mathematical equation. It has three components: enlightened policy changes, Vanguard as a passionate champion of those changes, and outcome-oriented plan sponsors interested in adopting modern best practices. Over 20 years, this equation has dramatically improved retirement outcomes for millions of people.

If we look back 15 years, to before the era of automatic plan design, policymakers were looking to leverage the somewhat new field of behavioral finance and apply it to the world of retirement savings. Enter the Pension Protection Act of 2006 (PPA). In essence, policymakers were giving their blessing to the attributes of behavioral finance. For example, they embraced the concept that negative elections and defaults drive better outcomes. They identified this best practice and provided the fiduciary relief necessary for sponsors to adopt this practice in the form of a safe harbor. They basically said: "We have your back if you sweep someone into the plan, as long as you give them an opt-out."

At the time, we were already proponents of behavioral finance, going all the way to the beginnings of our investor research efforts. In fact, that's been at the heart of How America Saves from the outset. Seeing the validity of these concepts, even experimenting with these concepts before they were broadly blessed by the Pension Protection Act, has been a guiding light.

Finally, we had the support of our clients—as plan sponsors longed to achieve higher plan participation and improved participant saving rates. We would agree on a common objective of trying to drive some of these data points like improved participation rates and improved saving rates. With traditional participant education, you would make progress, but it was gradual progress. Using behavioral finance and smart plan design made it much more efficient. It's faster and you get much better results.

One of the biggest differences between How America Saves 2000 and the 2021 edition is how much asset allocations have improved. Why is that?

Jeff Clark: It's certainly one of the more eye-popping trends. In our first edition of How America Saves, 15% of contributions went to cash and 20% went to company stock. Today, it's 8% cash and 3% company stock. Additionally, 39% of participants had either 0% equity or 100% equity compared with 8% today.

Extreme asset allocations have declined significantly over the last 20 years

Contribution allocations—Vanguard DC plans

Contribution alocations - Vanguard DC plans

Source: Vanguard 2021.

The shift is partly a result of PPA. As restrictions have eased, company stock use and concentrations have decreased. It's also a result of the rise in professionally managed allocations and the widespread use of target-date funds (TDFs), which have helped to significantly reduce extreme allocations and improve age-appropriate allocations. Ninety-five percent of plans now offer TDFs and 80% of participants are using them. Two-thirds of participants owning a TDF had their entire account invested in a single TDF.

Stinnett: Our research shows that TDFs really have solved for a range of what we call "portfolio construction errors." TDFs are a great solution to that problem because they provide broad diversification that adjusts with your age. It's not up to you to periodically revisit how you're investing and make changes. Particularly during times of market volatility, TDFs do what can be difficult, emotionally, for participants: They reallocate and rebalance to maintain optimal diversification. It's really been a game changer, especially when you combine them with other automatic solutions.

Can you expand on what we've seen regarding automatic solutions?

Clark: Adoption of automatic features—particularly automatic enrollment—has been one of the primary reasons we have seen an increase in participation rates.

If we look back to 2005—before the PPA—the participant-weighted rate was 65%, and the plan-weighted rate was 74%. By comparison, the participant-weighted rate was 78% in 2020, while the plan-weighted rate was 84%.

Participation rate trends

Participation rate trends chart

Source: How America Saves 2021, Vanguard.

All data as of December 31, 2020, unless otherwise noted.

And when you just look at plans with automatic enrollment, the participation rates are even more impressive. They had a 92% participation rate, compared with a participation rate of 62% for plans with voluntary enrollment.

Automatic enrollment also leads to higher total saving rates, which include both employee and employer contributions. In 2020, employees in plans using automatic enrollment saved an average of 10.7%, compared with 6.8% for those using voluntary enrollment. The result: Employees who worked for firms with automatic enrollment saved more than 50% more for retirement in 2020 than those employed at firms with voluntary enrollment.

And improvements to automatic enrollment strategies continue.

Why do we believe improvements will continue?

Stinnett: As impressive as the stats are right now—the progress we've seen—the fact of the matter is if you're going to implement automatic enrollment, you really need to do that in tandem with automatic increase.

Our research shows that participants enrolled in a plan with automatic increase save, on average, 20% to 30% more after three years in the plan, compared with participants in an automatic enrollment plan that does not automatically increase participants.

And because we believe retirement success hinges on participants reaching a target saving rate of 12% to 15% as soon as possible, an automatic increase feature—coupled with automatic enrollment at least at the employer-match level—is a very powerful way to help participants reach their target.

Staying with investor behavior, how has it changed regarding in-plan loans and withdrawals and why?

Clark: Loan issuances have been slightly decreasing over the past several years. Nonhardships (excluding the coronavirus-related distributions permitted by The CARES Act in 2020) have been somewhat stable. Hardships were stable for many years, went up in 2019 because of the 2018 Bipartisan Budget Act, but then decreased in 2020. Again, coronavirus-related distributions (CRDs) are excluded from this analysis. But of the participants offered the option to withdraw assets, just 5.7% accessed a portion of their savings.

Looking ahead, we anticipate nonhardships and hardships to revert to pre-COVID-like use.

Stinnett: Overall, it's a very small portion of assets that leave the plans via withdrawals, and our plan sponsors deserve a lot of the credit. Plan sponsors have worked with us over the years to try to address the problem of "leakage." They've sought to preserve these features but also try to limit them so that plan participants only use them when needed, rather than constantly churning and taking distributions.

How about trading activity? How has that changed and why?

Clark: Even throughout the volatility of 2020, 9 of 10 participants did not trade. While trading activity did increase slightly compared with the prior five years, the most common action taken in 2020 was to rebalance an account—quite remarkable given the market and economic turbulence of last year.

Target-date funds (TDFs) are a major factor in the long-term decrease in trading activity. As target-date use has increased, we have seen a decline in participant-directed exchanges. Our research has shown that pure TDF investors are four to five times less likely to trade when compared with other participants.

Looking at the next 20 years and beyond, what do you think the next "mega trends" will be?

Clark: I think we'll continue to see TDF adoption and TDF innovation such as the contemplation of additional glide paths with a higher equity jumping off point.

We believe we'll see continued growth in automatic solutions because—as we mentioned—there is still room for plans to adopt them. But we also see regulation helping growth. For example, the Securing a Strong Retirement Act of 2021, proposed legislation introduced in October 2020, would require automatic enrollment for participants in new defined contribution plans—an important acknowledgment that the feature benefits retirement security.

Trends in demographics will also have an impact. Baby boomers are retiring at a rate of 10,000 a day through 2029, when the youngest will reach age 65. And as more participants reach retirement, many find themselves asking: What should I do next? More plan sponsors are responding by looking at how best to make their plan a destination for retirees, helping them to both save for retirement and spend in retirement.

Stinnett: We also see advice as an emerging trend. Plan sponsors are increasingly choosing to offer an in-plan advice option, and more participants are signing up—trends that we expect to continue.

Advice is a really good solution for participants who want personalized guidance and want the emotional value of advice—of knowing that there's a personalized professional approach to your investing needs. And more plan sponsors are adopting advice, with good reason. Because more and more, plan design is about helping participants save for retirement and spend in retirement.

We stand ready to partner with plan sponsors, to identify enduring and cutting-edge plan design features that we believe will lead to improved participant performance.

How America Saves trends at a glance

Participation 20012005 2010 2015 2020
Plans with automatic enrollement   5% 27% 41% 54%
Automatic enrollment plans with 4%+ default   27% 28% 43% 57%
Plans offering Roth contributions     42% 60% 74%
Plan-weighted participation rate 76% 74% 76% 81% 84%
Automatic enrollment participant-weighted participation rate     86% 92% 92%
Average account balance $48,717 $67,856 $79,077 $96,288 $129,157
Investment decisions 2001   2005    2010   2015   2020  
Plans offering target-date funds   28% 79% 90% 95%
Plans offering managed account program   5% 13% 25% 39%
Participants using professionally managed allocations   9% 29% 48% 62%
Participants using target-date funds   18% 42% 70% 80%
Participants with balanced strategies   39% 57% 70% 76%
Participants using company stock 31%     29%      20%     14%       9%      
Extreme participant asset allocations
(100% fixed income or equity)
      34%      22%     12%       8%      
Participant-directed trading 14%     19%      10%     9%       10%      

Source: Vanguard 2021.


  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
  • Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments tomore conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.
  • Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.