Key trends shaping the retirement plan landscape are positively impacting participant outcomes. As documented in the 20th edition of How America Saves—the definitive look at Americans' retirement saving habits—these trends include increasingly more-appropriate asset allocations, rising participation rates, decreasing loan use, and an increasing use of financial advice.
Several factors are driving these trends, including plan sponsors' desire to ensure their participants are cared for both to and through retirement, regulatory changes, market forces, and an aging participant population. Understanding this enables us to better determine if these trends will continue and how we as an industry can respond.
What follows is a discussion about these trends and what they could mean for retirement plans going forward with David Stinnett, a principal who heads Vanguard Strategic Retirement Consulting (SRC), and Jeff Clark, the lead author of How America Saves 2021.
At the highest level, to what do we attribute improvements in retirement plan design?
David Stinnett: I think about it as the outcome of a mathematical equation. It has three components: enlightened policy changes, Vanguard as a passionate champion of those changes, and outcome-oriented plan sponsors interested in adopting modern best practices. Over 20 years, this equation has dramatically improved retirement outcomes for millions of people.
If we look back 15 years, to before the era of automatic plan design, policymakers were looking to leverage the somewhat new field of behavioral finance and apply it to the world of retirement savings. Enter the Pension Protection Act of 2006 (PPA). In essence, policymakers were giving their blessing to the attributes of behavioral finance. For example, they embraced the concept that negative elections and defaults drive better outcomes. They identified this best practice and provided the fiduciary relief necessary for sponsors to adopt this practice in the form of a safe harbor. They basically said: "We have your back if you sweep someone into the plan, as long as you give them an opt-out."
At the time, we were already proponents of behavioral finance, going all the way to the beginnings of our investor research efforts. In fact, that's been at the heart of How America Saves from the outset. Seeing the validity of these concepts, even experimenting with these concepts before they were broadly blessed by the Pension Protection Act, has been a guiding light.
Finally, we had the support of our clients—as plan sponsors longed to achieve higher plan participation and improved participant saving rates. We would agree on a common objective of trying to drive some of these data points like improved participation rates and improved saving rates. With traditional participant education, you would make progress, but it was gradual progress. Using behavioral finance and smart plan design made it much more efficient. It's faster and you get much better results.
One of the biggest differences between How America Saves 2000 and the 2021 edition is how much asset allocations have improved. Why is that?
Jeff Clark: It's certainly one of the more eye-popping trends. In our first edition of How America Saves, 15% of contributions went to cash and 20% went to company stock. Today, it's 8% cash and 3% company stock. Additionally, 39% of participants had either 0% equity or 100% equity compared with 8% today.
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