Vanguard: Retirement Plans Should Evolve for the Modern Worker


VALLEY FORGE, PA — Vanguard recently released the newest edition of How America Saves, the firm’s seminal report on 401(k) plan design and retirement savings habits. Through its annual, comprehensive analysis of nearly five million 401(k) accounts recordkept at Vanguard, the report reveals additional plan design opportunities employers can address to further improve workers’ retirement readiness. While employers have made significant progress in adopting leading plan designs and features, many participants are facing increasingly complex financial situations and life events that can compromise their retirement savings efforts.

“There is no doubt that plan sponsors’ efforts over the last two decades have helped improve the retirement readiness of millions of Americans. However, workers’ needs are evolving and so too should plan design,” said John James, managing director and head of Vanguard Institutional Investor Group. “Plan sponsors are uniquely positioned to support their employees’ financial well-being with integrated tools, advice, and services that can help improve their overall financial peace of mind.”

Persistent Progress
For more than two decades, Vanguard’s How America Saves report has served as a premier source of benchmarking and retirement data for plan sponsors and consultants. Along with the companion piece Insights to Actionwhich provides practical advice for sponsors seeking to optimize their plan designVanguard’s research illustrates several areas for improvement that plan sponsors can address to further drive participant outcomes.

Key findings of How America Saves include:

  • Professionally managed portfolios vastly improve portfolio construction but are less popular with older participants. Target-date funds and other professionally managed allocations have reduced frequent trading and extreme equity allocations among participants by three-quarters since 2006. Yet, more than half of participants over age 55 remain do-it-yourself investors, leaving some savers vulnerable to significant portfolio volatility. Professionally managed solutions can help diversify older investors’ holdings and right-size their risk.
  • Savings rates remain steady but may be insufficient for retirement readiness. Thanks to automatic deferrals and increases, the median total contribution rate—which includes both participant and employer contributions—stood at 10.4% in 2021, up modestly from 10% in 2017. However, roughly half of all participants continue to save below the recommended savings rate of 12-15% of their salary. Vanguard research shows minor deferral increases could help close this savings gap, as one-fifth of participants saving below these levels are just 1-3% away from their target savings rate.
  • Cash outs disproportionately impact younger, low-balance participants. Most participants with 401(k) balances of less than $1,000 voluntarily or are automatically cashed out of their retirement savings when they leave an employer, compared to just 7% of participants with balances over $100,000. Participants who prematurely cash out their retirement savings risk immediate tax consequences and may forfeit future savings and returns if assets are not reinvested in a tax-sheltered account. Auto portability services and revisions to minimum balance rules can help decrease cash out rates.
  • Participants are changing jobs more frequently and may risk retirement savings interruptions. Nearly one-third of plan sponsors require employees to work at the company for a period before they are eligible to contribute to their retirement plan. To help ensure participants’ savings efforts continue unabated throughout their career, plan sponsors should consider adopting plan design features, such as higher default rates, immediate eligibility and vesting, and integrated financial well-being services.

Improving retirement outcomes for all
Vanguard marries deep retirement expertise with technology-driven, client-centric innovation to deliver a comprehensive, world-class recordkeeping experience for plan sponsors and participants alike. As part of Vanguard’s recordkeeping offer, plan sponsors have access to Vanguard Strategic Retirement Consulting, which draws upon its team of attorneys, actuaries, behavioral finance experts, and benefit plan professionals to develop innovative plan features and capabilities designed to improve participant outcomes. As part of the firm’s mission to give all investors the best chance for success, Vanguard also regularly advocates for industry best practices and policy changes, such as the SECURE 2.0 legislation, that help improve Americans’ chances of financial security in retirement.

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