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Vanguard is a 100% client-owned firm, committed to improving investors' financial well-being and helping DC plan participants prepare for retirement.1 We publish How America Saves annually so that DC plan sponsors and consultants will have access to data that can help them make informed plan design decisions to improve their participants’ retirement readiness.
Now we’re kicking off a series of articles targeting specific data points that plan sponsors and consultants can use to enhance their plans. We’ll offer insights from the author of How America Saves and other Vanguard experts. And we’ll give you practical tips on how you can improve participants’ chances for retirement success.
Tip 1: Start with your industry benchmark report
Jeff Clark, the author of How America Saves 2024, says that a good place to start might be with a How America Saves industry benchmark report. We’ve published 16 industry benchmark reports, covering fields that include finance; technology; manufacturing; professional, scientific, and technical services; and ambulatory health care services. “The appropriate benchmark report will give you a quick aggregate overview of how other plans in your industry are designed and how they influence participant behaviors,” Clark explains.
The benchmark reports contain charts showing average participant balances and deferral rates, automatic enrollment options, and advice services offered. “How America Saves benchmark reports are a great resource in making sure we are offering a competitive plan compared to our peers,” says Brad Plaman, manager, retirement plans, at Dorsey & Whitney LLP.
Tip 2: Enhance your plans’ automatic enrollment default settings
59% of plans offered automatic enrollment in 2023.
In 2023, 29% of plans that automatically enrolled participants defaulted them to a 6% or higher contribution rate. Sixty-nine percent of plans automatically increased the contribution rate annually. And 98% of plans defaulted their participants into a target-date fund (TDF).2
“Sponsors and consultants should pay particular attention to their plans’ default contribution rate,” Clark says. “Not too long ago, employers defaulted participants into the 401(k) at 2% or 3% of their pay, and many stayed at that level. Now companies are trying to get workers into the plan and saving more aggressively.”
Tip 3: Help your participants invest appropriately with TDFs and advice
Participants with professionally managed allocations (PMAs) have their account balances invested in a TDF, a traditional balanced fund, or in a managed account advisory service.
TDFs help participants keep their DC plan investments aligned appropriately to their age. “In 2005,” Clark says, “we found that participants’ equity allocation was a hump-shaped curve, with younger participants allocating conservatively, middle-aged participants holding the highest equity exposures, and older participants having equity exposures similar to younger participants” (see Figure 2).
But in 2023, as the chart shows, the equity allocation curve of Vanguard DC participants sloped downward by age. Younger participants—those with the longest investment horizon—had significantly increased their allocation to stocks. “In 2005,” Clark says, “participants under 25 had allocated only 57% of their portfolios to equities. By 2023, that figure had risen to 88%.”
The designation of TDFs as the most common default investments has helped shift the equity allocation curve, Clark says. “We've seen that participants have both been defaulted into TDFs and are choosing them on their own, which are both contributing to the shift."
Financial advice can also help improve participant outcomes. Participants enrolled in advice tend to be more engaged and demonstrate stronger saving behaviors than their peers, including higher average saving rates and more personalized equity allocation based on their risk preferences. “The percentage of plans offering managed account advice is at an all-time high,” Clark says, “and more than 3 in 4 participants now have access to advice."
1 Vanguard is owned by its funds, which are owned by Vanguard's fund shareholder clients. Our retail direct investment advisory strategies, in turn, are built on core investments in the Vanguard funds.
2 Vanguard, How America Saves 2024.
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Notes:
- 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.
- Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment 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.