Encouraging Trends in 401(k) Plan Design

Amber L. Brestowski

In my conversations with Vanguard’s 401(k) plan sponsor clients, two questions frequently come up: 1) how are plans doing in helping participants save for retirement and 2) what’s next on the retirement plan horizon?

For many years, the singular goal of defined contribution plans was retirement savings, and the growing adoption of automatic enrollment and improvement in plan designs has helped increase employee retirement savings over the last two decades. But plan sponsors and investment providers like Vanguard are also broadening their focus to support employees’ holistic financial lives through financial wellness tools, advice, and increased personalization to improve employee wellbeing. Sponsors should consider these important trends as they review their plans before the 2024 enrollment this fall.

Progress in Employee Retirement Savings

The 2024 edition of How America Saves, Vanguard’s annual assessment on the savings behavior of nearly five million retirement plan participants, shows how much progress has been made over the past 20-plus years in strengthening employee retirement savings.

In 2023, 59% of all plans had adopted automatic enrollment, a record high. Ten years ago, only 34% of plans used autoenrollment. Among plans with at least 1,000 participants, 77% have adopted this powerful plan design feature.

Autoenrollment plan designs continue to improve. In 2023, 60% of plans defaulted employees at a deferral rate of 4% or higher. Only 35% of plans defaulted at 4% or greater a decade earlier. Total savings rates in plans that automatically enroll are 60% higher than those that voluntarily enroll. In 2023, employees in plans with automatic enrollment saved 12.3% versus 7.4% in plans that voluntarily enroll.

Overall, retirement plan participants are also saving at higher rates. Average participant deferral rates reached 7.4% in 2023, the highest level ever. Twenty-four percent of participants are deferring 10% or more, up from 19% ten years ago.

Participant portfolio construction has become more diversified. Sixty-six percent of participants are in professionally managed allocations, including target-date funds, balanced funds, and managed accounts, up from 40% ten years ago. Professionally managed allocations have done an incredible job of reducing extreme equity allocations (0% or 100% equity). Before the growth of these options, more than one third of participants had an extreme equity allocation. In 2023, these extreme allocations represented just 8% of participant portfolios.

Improved plan designs have led to record highs in plan participation and participant savings rates. The overall average plan participation rate remained at an all-time high of 85% in 2023. When we began publishing How America Saves more than two decades ago, 1 in 3 employees did not participate in their employer plan.

Expanding What 401(k)s Can Accomplish

But as America’s workforce evolves, modern retirement plans must also evolve, and we are making great progress in three critical areas.

Financial wellness: Plan sponsors continue to focus on participant outcomes in savings for retirement. However, they also recognize that their employees often experience headwinds in the process of saving for retirement. As a result, they are increasingly focused on participants’ total financial wellness and are interested in metrics that evaluate their employees’ progress along the broader financial journey.

For example, employees might be challenged with high levels of debt, or they might have multiple goals, including saving for education or buying a house. To this end, Vanguard is continuously enhancing our retirement digital experiences. In the past year, we have added an emergency savings calculator and a debt paydown strategy tool along with enhancing retirement planning tools for participants. Enhancements like this make a difference. We have found that nearly 50% of participants are more likely to save more after engaging with our financial wellness digital experience.

Advice: Advice is a powerful tool for improving financial outcomes. But it is no longer just about portfolio management. Rather, it includes a range of financial planning solutions. Participants getting advice tend to be more engaged and demonstrate stronger savings behaviors than their peers, including higher average savings rates. While the percentage of accounts in plans offering managed account advice is at an all-time high and more than three in four participants now have access to advice, only 10% of participants with access to advice use it. So, expect continued efforts to increase adoption in this area.

Personalization: Navigating multiple financial goals alongside their retirement goals can be overwhelming for participants and can lead to confusion and inaction. But thanks to better data and technology, such as AI, we can help deliver personalized experiences for participants that help them take the next best action.

Personalized financial advice and financial wellness tools that employees can access within their plans make it easier for participants to prioritize retirement savings while managing other financial priorities. Increasingly, we can individualize recommendations, reminders, and guidance for participants based on what they have shared with us about their full financial pictures.

Plan sponsors have been instrumental in helping to prepare more participants for a secure retirement through autoenrollment and other plan design innovations. But more is being done to help workers. Financial wellness, advice, and increased personalization are expanding the possibility of what 401(k) plans can accomplish. As sponsors continue to expand the scope of support for their employees, Vanguard stands ready to support positive behaviors and improve participant outcomes.

Amber L. Brestowski is the head of institutional advice and client experience at Vanguard.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.