Vanguard: Mistakes Remain, But Participants Are Better Users of TDFs

Vanguard reports that more than half of 401(k) participants are now invested in a single target-date fund (TDF), compared with only 13% just a decade ago.

Vanguard’s “How America Saves 2018” suggests target-date funds continue to reshape the investment patterns of retirement savers, driving increased diversification and deterring errant, emotional trading.

Looking ahead, Vanguard researchers estimate that 77% of the participants on the firm’s recordkeeping platform will be invested in a single TDF by 2022.

As the data shared by Vanguard show, when constructing their own retirement portfolios, about 10% of participants still tend to hold extreme allocations—defined as either 0% or 100% equities in a retirement-focused portfolio.

“With the advent of TDFs, three-quarters of all participants now have broadly diversified portfolios—up from only half 10 years ago,” Vanguard’s report states. “The rate of participants holding concentrated stock positions fell by half during the same time frame. TDFs also help investors ‘stay the course’ with their investment plans, with only 2% of TDF investors executing a trade in 2017.”

The publication of the report comes alongside something of a reinvigoration of the target-date fund research topic in the financial services trade media. As the Great Recession of 2008 and 2009 recedes further in the rear-view mirror, providers seem increasingly concerned about investor complacency—and on the optimal way to shape their risk glide paths for TDF product users who are approaching and entering retirement. Providers in 2018 are also more prone to discuss the way workplace demographic shifts are morphing their approach to risk management and product presentation.

“Target-date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers,” observes 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.”

According to the “How America Saves” report, 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,” the report explains. “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 [bps].”

Vanguard’s data further show, 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%,” adds 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 that meaningful advances in plan design have such a tangible, positive impact on retirement savings for participants.”

The full Vanguard analysis can be downloaded here.