In a recent blog, my colleague John Woerth took a walk down memory lane in honor of the “Back to the Future” franchise. He offered some great reminders about just how far we’ve come in the mutual fund industry since Marty McFly took to time traveling in Doc’s DeLorean from 1985 to 2015. John’s post touched briefly on how retirement plans have changed over the years, and I’d like to offer some additional commentary on the significant progress we’ve made as an industry.
Think about the defined contribution (DC) plan of 1985. DC plans were relatively new—to employers and employees alike—and they offered little in the way of investment choice or participant education. Today, they’re the primary retirement savings vehicle for millions of employees and are designed to make the complex task of saving for retirement easy and automatic.
How did we get from there to here? A few key developments have paved the way for today’s best practices in DC plans.
- Auto-everything. When DC plans entered the marketplace, enrollment was voluntary. Some employees signed up on their own, but it wasn’t until automatic enrollment took hold that we saw participation rates steadily increase. We’re now seeing participation rates routinely top 90% in plans that automatically enroll their employees.
Given the success of this approach, it’s no surprise that employers are looking for other ways to simplify decision-making for their participants. Instead of asking people to make a series of choices—to join the plan, to set their deferral rate, to determine their asset allocation, to select their investments—plans can put employees on a productive retirement path from the day they join the company through various auto and default features.
- Simplified, streamlined lineups. When I started contributing to my first 401(k), I think I had two fund choices: a stock fund and a guaranteed investment contract. It wasn’t long before that lineup expanded into a long list of 20, 30, or 40 funds. Talk about choice overload! New participants were quickly overwhelmed by the task of selecting funds, which could lead to indecision or needlessly complex (and potentially costly) portfolios. Educational programs grew and evolved to help participants choose and manage their investments, but with limited success.
The introduction of target-date funds (TDFs) and the Pension Protection Act’s designation of TDFs as a qualified default investment were catalysts for rethinking how participants invest in their retirement. Flexibility and choice are still a part of today’s investment lineups, but plans are relying more on plan design than education to guide participants’ decisions. TDF defaults and tiered lineups are helping participants develop more balanced and diversified retirement portfolios. Ten years ago, 1 in 3 participants held an extreme allocation position—21% had all-equity portfolios, while 13% held no equities—and today that number has dropped to roughly 1 in 8 participants.*
- Action-oriented education. As DC plans have changed, so have their education programs. Early initiatives focused on delivering a wealth of information to participants—about the plan, about investing, and about planning for retirement. Research and technology changed all that. Instead of presenting information, we’re now driving action.
The field of behavioral finance reinforced that good intentions are often sidetracked by inertia and indecision. Although participants want to save more and invest wisely, they often don’t know where to start or what steps to take. Breaking down the complex and imposing task of “saving for retirement” into small, actionable steps has transformed what education looks like in our DC plans. And more and more of these steps are completed on-the-go, as technology enables participants to manage their retirement with a click, a tap, or a swipe.
Reflecting on the past helps frame the progress we’ve made, but predicting the future is more difficult, especially when you don’t have access to a DeLorean. I may not know exactly what the future holds, but I can tell you where our priorities lie:
- We’re committed to extending our work with automation to help those who are focused on generating retirement income.
- We’re working with plan sponsors to optimize their lineups and help their participants build balanced, low-cost portfolios.
- And by leveraging research and technology, we’re delivering educational resources that we hope will really resonate with participants and motivate them to act.
With these priorities in place, I don’t need a time machine to know that the retirement plan of the future can serve employees extremely well at every stage of their journey.
*Source: How America Saves 2015. Vanguard Center for Retirement Research.
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.