Vanguard reports that more than half of 401(k) participants are now invested in a single target-date fund (TDF), compared to only 13% just ten years ago. According to How America Saves 2018, Vanguard’s annual defined contribution (DC) benchmarking report, TDFs have continued to reshape the investment patterns of retirement savers, driving increased diversification and deterring trading. Vanguard researchers estimate that 77% of Vanguard participants will be invested in a single TDF by 2022.
When constructing their own retirement portfolios, about 10% of participants tend to hold extreme allocations (0% or 100% equities). With the advent of TDFs, three-quarters of all participants now have broadly-diversified portfolios—up from only half ten years ago. The rate of participants holding concentrated stock positions fell by half during the same timeframe. TDFs also help investors “stay the course” with their investment plans, with only 2% of TDF investors executing a trade in 2017.
“Target-date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers,” said Martha King, managing director and head of the Vanguard Institutional Investor Group. “Many participants lack the time, willingness, and expertise to build and manage their retirement portfolios, and TDFs offer a professionally-managed investment option at a very low cost.”
With more than $650 billion in TDF assets under management, Vanguard leads the industry in TDF assets and cash flow. According to Morningstar, 54% of all industry TDF cash flow went to Vanguard Target Retirement Funds (TRF) in 2017. With an average asset-weighted cost of 0.13%, Vanguard TRFs cost one-quarter of the industry average1, meaning participants can keep more of their earnings for their future retirement needs.
Smart plan design enhances retirement savings
Over the past decade, plan sponsors have implemented thoughtful plan designs to influence and improve employee retirement savings. The dramatic rise of TDFs—and subsequent portfolio construction benefit—has been driven by the adoption of automatic enrollment, which has tripled in the last decade to nearly half of plans. Plans with automatic enrollment have a 92% participation rate, compared with a participation rate of just 57% for plans with voluntary enrollment—meaning more employees are saving for retirement.
When automatic features were first introduced, many plan sponsors defaulted participants into plans at low rates in an attempt to prevent opt-outs. Half of plans now default participants in at a savings rate of 4% or higher, up from just one-quarter ten years ago. Not only are sponsors using higher default rates, but of those plans with automatic enrollment, two-thirds have also implemented automatic annual deferral rate increases. Importantly, automatic increases have helped to narrow the spread between deferral rates for participants in voluntary plans vs. automatic enrollment plans to just 0.3 basis points. When both employee and employer contributions are taken into account, the average savings rate of 10.5% has held fairly steady over a 15-year period.
“More people are participating in their employer-sponsored 401(k) plan than ever before, and saving at a healthy rate of about 10%,” said Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of How America Saves. “After over a decade of leading this research, it’s gratifying to see meaningful advances in plan design have such a tangible, positive impact on retirement savings for participants.”
With $1.2 trillion in DC assets under management, Vanguard serves as recordkeeper and strategic partner to more than 1,900 qualified plan sponsors—helping them to develop well-designed DC plans for more than 4.6 million participants. Vanguard has long been recognized as an industry leader in DC plan design and services, providing sponsors with the investment options, technology, tools, and research to help prepare participants for retirement.