Joel Dickson: How America Saves

Episode Summary

Executive Summary: The episode examines Vanguard’s 2023 How America Saves report with Joel Dixon, highlighting stronger-than-expected resilience in 401(k) behavior after COVID and market volatility. Auto-enrollment, target-date funds, and managed advice have improved participation, contribution consistency, and asset allocation, though savings rates still need to rise for many workers to reach retirement sufficiency.

Main Topics: State of retirement readiness in Vanguard plans (Priority: 5/5): Dixon frames How America Saves as a flagship look at behavior and outcomes across roughly 1,700 employer plans and 5 million participants, showing broad improvement in participation and saving quality. COVID-era resilience and post-pandemic trends (Priority: 5/5): The report finds participants remained remarkably steady through the pandemic and 2022 market declines, with strong participation, stable contribution rates, and low trading activity despite falling balances. Automatic enrollment and auto-escalation (Priority: 5/5): Auto-enrollment is presented as the most important plan-design innovation, lifting participation dramatically and helping more workers save, especially lower-income employees; auto-escalation further increases savings over time. Target-date funds and portfolio simplification (Priority: 4/5): Participants increasingly hold a single target-date fund, reducing extreme equity positions and creating more age-appropriate portfolios, especially among younger workers. Plan sponsor design choices and personalization (Priority: 4/5): Sponsors are increasingly tailoring plans to workforce needs via features like Roth, emergency savings, student loan matching, and advice, with personalization becoming a central design trend. Gender, income, and plan-size differences (Priority: 3/5): The conversation explores persistent balance gaps by gender and by smaller vs. larger plans, while noting that participation and investment behavior have converged in many respects. Managed accounts and retirement income planning (Priority: 4/5): Managed accounts are growing as a way to provide personalized advice on savings, investments, Social Security timing, and retirement income—moving beyond simple asset allocation.

Key Arguments: Retirement plan participants proved highly resilient during COVID and the 2022 market downturn; the bigger story is improved plan design rather than investor panic. Auto-enrollment is the single biggest driver of higher participation, and opt-outs remain low, suggesting inertia matters a lot in retirement saving. Higher default contribution rates have become more common without materially increasing opt-outs, so plan defaults can effectively raise savings. Target-date funds have helped reduce extreme asset allocations and improved age-appropriate investing, especially among younger workers. The average participant’s current-plan balance can understate true retirement readiness because the data do not capture prior employers’ accounts or rollovers. A total contribution rate around 10.6% is close to, but still short of, the roughly 12%–15% often cited as needed for retirement sufficiency. Personalized advice and managed accounts are increasingly important because retirement success depends on more than balances; it includes savings rate, retirement age, Social Security claiming, and income needs. Smaller plans have historically lagged larger plans in quality, but the gap is narrowing as scalable auto-enrollment, low-cost investments, and best practices spread. Rollovers remain a weak spot in the system because assets leaving plans often move to cash-heavy IRAs, potentially hurting long-term outcomes.

Data Points: Plans in Vanguard database: ~1,700 employer-sponsored plans - Vanguard record-kept workplace retirement plans covered by How America Saves Participants covered: ~5 million participants - Size of Vanguard’s workplace retirement plan universe Participation rate among eligible employees: 83% - Strongest participation rate ever seen across Vanguard’s universe in 2022 Plan participation rate in sample: 85% - Overall participation cited early in the discussion Total contribution rate: 10.5%+ - Combined employee and employer contributions across the participant base Median participant age: 43 - Typical participant profile in the report Median job tenure: 7 years - Typical current-employer tenure in Vanguard’s data Median eligible employee income: $74,000–$75,000 - Income level for eligible employees in 2022 Median participant income: $82,000 - Income for participants in the plan Median non-participant income: $42,000 - Income for eligible employees who do not participate Men in sample: 56% - Participant gender mix in the database Participants in a single target-date fund: 59% - Share of participants using one target-date fund as primary investment Participants making a trade in 2022: 6% - Participant-directed trading activity at an all-time low Participants with multiple target-date funds: ~5% - Indicator of improved portfolio simplicity Auto-enrollment plan participation rate: 93% - Participation in plans with auto-enrollment Voluntary enrollment plan participation rate: ~70% - Participation in plans without auto-enrollment Plans with automatic enrollment: ~60% - Share of retirement plans offering auto-enrollment Employee opt-out rate in auto-enrollment plans: 7% - Only a small minority opt out Plans with auto-enrollment and auto-escalation: ~40% - Share offering both features Participants who increase deferrals annually via auto-escalation: ~25% - Automatic increase behavior each year Participants who voluntarily increase deferrals annually: ~15% - Additional self-directed contribution increases Participants who decrease contribution rates annually: ~5% - Small share reducing savings in any given year Plans allowing day-one contribution: 72% - Share of plans enabling immediate participation Traditional default contribution rate historically: ~3% - Earlier default before higher-rate trend Current default contribution rate commonly: 4% or greater - Modern auto-enrollment defaults Participants needing only modest savings boost: ~20% need 1%–3% more - Estimated share close to target savings rates Total equity exposure at age 35 or younger in recent years: ~90% - Younger participants now hold much more equity than in 2005–2007 Older participants’ equity exposure trend: ~50% by early retirement - Current glide-path-like pattern among older ages Zero-equity participants: 2% - Current share with no equity exposure 100% equity participants: 5% - Current share with all-equity exposure Zero-equity balance share: 3% - Balance-weighted measure of no-equity exposure 100% equity balance share: 4% - Balance-weighted measure of all-equity exposure Target savings rate guideline: 12%–15% of pay - Dixon’s rule of thumb for retirement sufficiency Typical total contribution rate: 10.6% - Median participant deferral plus employer match Managed accounts offered to participants: 77% - Share of participants offered some form of managed account Managed account participation rate: ~7% - Eligible participants actually using managed accounts Gender-equity parity: 86% equity median for both men and women - Median participant-weighted equity allocation by gender Average gender equity difference: Within 1 percentage point - Average equity weight for men and women is nearly identical

Pivotal Quotes: "The typical retirement plan and retirement plan participant is extraordinarily resilient over the COVID period." — Joel Dixon: Summarizing the report’s main takeaway about participant behavior during the pandemic and market volatility "Only about 5% of participants now invest in multiple target date funds." — Joel Dixon: Used to illustrate how participant portfolios have become simpler and more diversified "Automatic enrollment typically adds lower paid employees to the plan." — Joel Dixon: Explaining why plan sponsors’ cost concerns about auto-enrollment may be overstated

Implications: The report suggests 401(k) outcomes are improving thanks to better defaults and advice, but many workers still need higher savings rates and better rollover behavior. Plan sponsors should keep expanding auto-features and personalization.