How America Saves:
20 years of retirement plan progress
How America Saves' inaugural edition offers a baseline for retirement plan progress over the past two decades. Vanguard's initial analysis of defined contribution plan data predates automatic enrollment and target-date funds. With voluntary enrollment, plans placed the burden on employees to set their deferral rates and select investment options.
The introduction of target-date funds (TDFs) is a game changer. TDFs allow participants to achieve age-appropriate asset allocation through a single fund that automatically adjusts over time.
Introduced in the early 2000s, we begin to analyze benefits of automatic enrollment in 2005. Over time, it will have a dramatic impact on participation and saving rates.
The Pension Protection Act of 2006 enables the use of negative election and default options to drive better participant outcomes. Qualified default investment alternatives (QDIAs) are introduced, and many plans opt to use target-date funds as their default.
Participation rate remains the broadest metric for gauging 401(K) plan performance. In How America Saves 2009, we start to see the impact of the Pension Protection Act. Plan-weighted participation rates rise steadily as more sponsors adopt automatic enrollment.
Automatic enrollment harnesses the power of inertia by enrolling eligible employees into the plan at a designated deferral rate. In 2010, we see a shift in plan design with sponsors opting for higher default rates. If the trend continues, a 6% deferral rate could become the most common default for automatic enrollment plans in the coming years.
Introduced in 2006, Roth 401(k) contributions provide participants with the opportunity to diversify taxes through their retirement plans. In 2013, in-plan conversions are introduced, enabling participants to convert pre-tax contributions into Roth 401(k) contributions.
For the first time, more than half of participants have professionally managed allocations, meaning they hold either pure target-date funds, other balanced funds, or managed accounts. Over time, we see a decline in extreme portfolio allocations (0% or 100% equity) because increased use of professionally managed allocations.
The use of in-plan advice options continues to trend up for plan sponsors, appealing to participants who seek personalized guidance beyond traditional portfolio construction.
Trading activity has declined over the past two decades, reaching an all-time low of 7% in 2019. The downward trend in exchanges in attributed to widespread use of TDFs, which automatically rebalance over time.