As expected, target-date funds and smart plan design features—including automatic enrollment, automatic escalation, and others—helped 401k participants stay the course during the COVID-19 pandemic.
Target-date funds, widely praised for keeping participants invested and on track during previous economic downturns like 2008’s financial crisis, did so again in the volatility of 2020, according to the most recent edition of Vanguard’s How America Saves.
Smart plan design encourages greater retirement savings
The adoption of DC plan design features helped more participants save for retirement and keep their focus on the long term, even in the wake of last year’s unprecedented market uncertainty. Specifically:
- Participants’ increasing use of target-date funds—which offer a risk-adjusted, all-in-one portfolio solution—led to a 75% decrease in extreme equity allocations among participants over the last 15 years.
- Target-date funds tamped down frequent trading—96% of participants holding a single target-date fund did not make a trade last year.
- Automatic enrollment helped employees save 50% more for retirement than those at companies offering voluntary enrollment.
- Annual automated deferral increases resulted in participants saving 20-30% more after three years than employees without automatic increases.
Driving better retirement outcomes
A supplemental report released by Vanguard, titled Insights to Action encourages plan sponsors to focus on key areas:
- Automatic features
- Adoption of advice and retiree-friendly policies, and
- Curtailing of frequent loans and withdrawals.
Combined, these plan design features can meaningfully improve participation and savings rates and keep participants on track for retirement.
“Retirement savings is just one piece of a participant’s broader financial picture, and they are increasingly looking to their employer plans for customized advice and solutions that take a more comprehensive approach to financial well-being,” John James, managing director and head of Vanguard Institutional Investor Group, said in a statement.
As of April 30, Vanguard managed $7.8 trillion in global assets.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.