Market volatility and lessons learned

At Vanguard, navigating bouts of market volatility is nothing new for us. We even developed a term for it: Vanguard weather. Our disciplined, low-cost, long-term approach is designed to help investors withstand periods of financial turbulence. 

As we monitor the behaviors of retirement plan participants, it’s important to reflect on what we have learned over many years. For nearly a quarter century, Vanguard has been publishing How America Saves, a comprehensive assessment of the plan designs and participant behaviors within defined contribution plans. Two of the most important findings from this research are that employers are relying on strong, automatic plan designs to improve retirement savings, and that the increased use of professionally managed allocations (target-date funds and advice services) has drastically improved participant investment allocations.  

Importantly, these automatic saving and investing solutions that have helped guide participants to improved outcomes also help them weather volatility. In reviewing historical participant behaviors chronicled in How America Saves, during times of economic uncertainty (tech bust, global financial crisis, COVID-19), while many have worried that participants might react rashly, our findings have indicated that, typically, participants stayed the course. When faced with unnerving periods of volatility, they mostly remained steadfast. 

The data is encouraging and reflects Vanguard’s recommendations when volatility increases: Focus on what’s within an investor’s control. How much are you saving? How much are you spending?  How do your investment costs compare, and is your asset allocation appropriate and well diversified? Amid the current market and economic uncertainty, Vanguard is observing similar acts of discipline and determination. 

Over the past 20 years, participant-directed exchange activity has fallen significantly. In the early 2000s, 20% of participants made exchanges in their retirement plan at some point during the year. Contrast that with 2024, when only 5% of participants made an exchange—a record low for How America Saves research. 

While market volatility can increase participant trading, the increase is generally modest. For example, when COVID-19 disrupted the markets in 2020, only 10% of participants traded at any point during the year. While this activity was up from 7% in 2019, it was still significantly lower compared with typical trading 15 years earlier, primarily because of the increased use of target-date funds. 

Typically, pure target-date fund investors are four to five times less likely to trade than other investors. In fact, only 1% of pure target-date fund investors traded in 2024, compared with 11% of all other nonadvised investors. Pure target-date fund investors not only benefit from age-appropriate equity allocations but can also from continuous rebalancing (which can be pronounced during periods of market volatility), and they are more likely to stay the course, even during turbulent economic periods.

In 2025, through April 11, 2.7% of all nonadvised participants made an exchange, up marginally from 2.5% during the same time period in 2024. This low rate continues to be driven by the high adoption of target-date funds, as less than 1% of pure target-date fund investors made an exchange through April 11 of this year.  

Plan loans allow participants to access their savings before retirement without incurring income taxes or tax penalties. During times of economic uncertainty, loans could be seen as a safety net to help stabilize household budgets. However, in tracking loan use over the 20+ years of How America Saves research, during extremely challenging economic times (the 2008 global financial crisis, COVID-19 in 2020), annual loan use declined by 15% and 22%, respectively. This indicates that participants may be more focused on managing their spending and, even as their retirement plan balance declines, are less likely to think about their plan as a source of short-term spending. Throughout 2024, overall loan transactions were in line with those in 2023 and remained below the pre-pandemic rate, with annual loan use about 10% lower than it was during the 2010s.  

Through the first quarter of 2025, loan issuances were generally in line with 2024, and as of the end of March, 13% of participants had a loan outstanding, in line with year-end 2024.

Hardship withdrawals allow participants to access a portion of their savings in response to a demonstrated financial hardship, such as receipt of an eviction or home foreclosure notice. They may also be used for purposes such as a college education, medical expenses, or the purchase or repair of a home. 

Until 2019, annual hardship withdrawal activity was consistent and relatively rare, with typically less than 2% of participants taking a withdrawal. There did not appear to be a correlation between hardship withdrawals and underlying economic or market volatility. 

The Bipartisan Budget Act of 2019 introduced changes to hardship withdrawal provisions designed to ease restrictions for participants who needed to access their qualified retirement plan assets, and hardship withdrawal activity increased during the year. In 2020, hardship withdrawals decreased by 16% due to the availability of coronavirus-related distributions, which offered favorable tax treatments. In 2021, hardship withdrawal activity reverted to pre-pandemic levels from 2019, and it has continued to increase in subsequent years. In 2024, 4.8% of participants initiated a hardship withdrawal.  

Through the first quarter of 2025, hardship withdrawal transactions were generally in line with the 2024 trend. Given that it’s now easier to request a hardship withdrawal and that automatic enrollment is helping more workers save for retirement, especially lower-income workers, modest increases over the past several years are not surprising.  

In 2024, 35% of hardship withdrawals were used to avoid a home foreclosure or eviction, which remained the most common reason for a hardship withdrawal. The second most common reason was medical expenses, as 3 in 10 hardship withdrawals were initiated for this purpose. Additionally, during the second half of 2024, there was a notable increase in hardship withdrawals used for home repair and FEMA disaster-relief purposes, likely attributable to weather-related catastrophes.  

Ultimately, the increased use of hardship withdrawals underscores the need for participants to have an emergency savings account. The median hardship withdrawal in 2024 was $2,200, in line with the typical amount needed to cover an unplanned expense. 

Employees are the primary source of funding in typical retirement plans. Therefore, how participants manage their payroll deferral percentages significantly affects their retirement savings.  In analyzing employee deferral rates across the 20+ years of How America Saves, there is not a correlation to market and economic conditions. However, over the past 10 years, employee deferral rates have increased by about 10%, primarily due to increases in automatic enrollment default rates and the inclusion of automatic annual increase features. More than 60% of automatic enrollment plans now default employees at a rate of 4% or more, and 7 in 10 plans automatically enroll participants into an annual increase feature.  

During 2024, 16% of participants increased their payroll deferral percentage, while 8% decreased it. An additional 29% of participants had their deferral percentage increased from an annual automatic escalation, leading to 45% of participants increasing their savings, the highest percentage we have tracked over the past six years. Since 2019, participant saving behaviors have remained consistent, which is encouraging considering the vastly different economic and market conditions of each year, such as COVID in 2020, market volatility and declines in 2022, and increased interest rates and inflationary pressures that have impacted household budgets in recent years. Through all these challenges, participants have remained incredibly resilient in their retirement saving behaviors.  

In the first quarter of 2025, 21% of participants increased their deferral rate (either on their own or through an annual increase feature), while only 6% of participants decreased or stopped contributing. These percentages are generally in line with first-quarter activity in 2023 and 2024. Strong plan designs are continuing to help participants stay the course when saving for retirement. 

Vanguard’s founder, John Bogle, once said, “Investing is not nearly as difficult as it looks.  Successful investing involves doing a few things right and avoiding serious mistakes.” Successfully saving for retirement boils down to doing just two things right—saving enough and investing appropriately. Through more than two decades of How America Saves research, there is significant progress on both fronts, primarily because of strong plan designs. As designs have improved, participation rates have hit all-time highs, saving rates have continued to increase, and the percentage of participants in professionally managed allocations has never been higher.  

And just as important, automatic saving and investing solutions have helped most participants avoid mistakes. Through various periods of economic and market volatility, participants have remained steadfast and resilient—continuing their strong saving, leveraging the benefits of professionally managed allocations, and staying the course through several bouts of Vanguard weather.

Notes

• All investing is subject to risk, including the possible loss of the money you invest. 
• 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 to more 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.
• Diversification does not ensure a profit or protect against a loss.