By Anna Davies
From building your nest egg to navigating financial hurdles, everyone’s journey to retirement is unique—but a clear road map is key to success. This is evident in research conducted by investment management company Vanguard in its comprehensive How America Saves 2024 report, which explores hundreds of retirement contribution plans, thousands of data points and the actions of millions of participants. For the past 23 years, Vanguard has been researching retirement trends and using data to help plan administrators optimize offerings.
The result? Retirement plan designs that are built to weather economic challenges, such as high interest rates and rising inflation. Despite these challenges, 2023 was a year of progress for retirement savings. The report found that 85% of eligible employees were enrolled in a plan, with an average saving rate of 7.4% of income—an all-time high.
“These trends show the remarkable commitment that sponsors and consultants have made to help employees reach their financial goals,” says John James, managing director of Vanguard Institutional Investor Group.
Here are four key findings from Vanguard’s report that illustrate how thoughtful plan designs built for today’s workforce can help employees confidently stay the course while saving for retirement.
1. Automatic Enrollment Is Increasing And Boosting Saving Rates
Historically, eligible employees had to opt in to an employer-sponsored retirement plan. But now, the report shows more plans are automatically enrolling participants, leading to higher participation rates. Ten years ago, only 35% of plans had a participation rate above 90%, per the report. “For a variety of reasons—inertia, procrastination, poor planning—some employees never enrolled,” says James. In 2023, 57% of Vanguard plans had a participation rate of 90% or higher.
“With autoenrollment, inertia actually works in employees’ favor, because now they’re effectively being asked whether they’d like to quit the plan,” James says.
He adds that plan participants and plan managers are also taking advantage of other automatic options, including automatic increases in deferral rates and investment in target-date funds.
“In the aggregate, these automatic features work well because they reduce the number of decisions that participants must make, decisions that many employees don’t feel confident about,” says James.
2. More Savers Are Opting For Professionally Managed Allocations
Professionally managed allocations, or PMAs, are when participants have their entire account invested in a single target-date fund (TDF), a target-risk fund or a traditional balanced fund, or else managed in an account advisory service. The report shows that in 2023, 66% of participants were invested in a PMA, up from 7% 20 years ago.
James credits this surge to several factors, including the vast majority (96%) of plans offering TDFs. Overall, 64% of all contributions went into TDFs in 2023, an all-time high, says James. The report says an important factor driving the popularity of TDFs is their function as an automatic or default investment strategy, minimizing the need for participants to self-manage their accounts and creating more balanced portfolios for savers. Because allocations are automatically adjusted based on a participant’s expected retirement timeline, savers can feel confident while taking a hands-off investing approach1.
“TDFs have also done an incredible job of reducing extreme equity allocations, meaning participants with a 0% or 100% equity allocation,” says James. “Just 8% of participants had such an extreme allocation in 2023, whereas before TDFs and advice were widely offered, more than a third of participants had a 0% or 100% equity allocation.”
3. Advice-Driven Investment Programs Rise In Popularity
It’s a balancing act for employees to manage saving for retirement with other financial goals, says James. Plan participants’ holistic financial well-being is now a priority for plan sponsors, and advice is becoming a key component of their efforts.
Recognizing the role advice can play in building financial wellness and confidence, more plan managers included advice opportunities among their offerings. According to the report, 43% of plans offered advice in 2023, providing access to 77% of plan participants.
“A qualified advice program should help participants avoid making investment errors,” says James. “For example, behavioral coaching and emotional support, especially during periods of market turmoil, can help participants avoid performance chasing and panic selling.”
Professional guidance included in a plan simplifies investing and helps savers optimize long-term outcomes, he says. Per the report, only 10% of plan participants used advice services in 2023, but James is optimistic this percentage will grow as more plans incorporate advice and more participants know these services are available to them.
4. Plan Managers Are Adapting To The Changing Workforce
An evolving workforce means that retirement plans must meet the needs of all employees, including Gen Z and Millennials, who are becoming a substantial portion of the labor market. “Our research shows that younger workers are especially benefiting from improved plan designs,” James says. “Participation rates of workers ages 25 to 34 have risen from 74% to 83% in the past 10 years.”
The report says plan sponsors are also seeking ways to support retirees within their plans: Sixty-seven percent allowed retirees to take installments and 40% of plans offered partial withdrawals, a significant increase from 27% in 2018.
Not only that, but the deferral rate for workers ages 25 to 34 increased by more than 20%, from 5.5% to 6.7%, between 2014 and 2023. Vanguard plans also provide additional investment avenues, such as making Roth contributions, which younger and higher-income participants tend to use. Over 80% of Vanguard plans had a Roth savings feature and 17% of plan participants took advantage of it, up from 12% in 2019.
Designing Retirement Plans For Success
As retirement plan designs continue to evolve amid a shifting financial landscape and workforce, it’s clear that plan sponsors are responding effectively to participants’ needs. With tools like automatic enrollment and PMAs, including advice, employees are better positioned to achieve their long-term financial goals.
Plus, plans that contain a robust suite of investment options, such as TDFs and Roth contributions, allow participants to customize their retirement strategy. These innovations, and more to come, are paving the way for stronger saving habits and more secure retirements for all.
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