The best way to predict the future is to invent it.
—Alan Kay, computer scientist
I’m not one to dwell on the past, but as I crossed the one-year mark heading Vanguard’s institutional business, it seemed natural to pause and reflect. The past year has been eventful here at Vanguard and across the industry. From expense ratio reductions and our annual report on DC plans to a new DOL fiduciary rule and the ongoing impact of Brexit, change is a natural part of our business.
If we look back even further and gauge our progress over the past ten years, I think it’s fair to say the past decade has been transformational. Every aspect of the business, from how participants plan for retirement to how institutions think about investment selection, has significantly evolved in a relatively short amount of time.
All companies handle change differently. There are firms that adapt quickly to the changing environment. Others are more cautious in their approach. As I thought about the evolution of Vanguard’s institutional business during the last decade, the quote above from Alan Kay came to mind. We’re firm believers in shaping the future, which has been helped greatly in recent years by a wealth of data, technology, and expertise.
One of the best examples of substantive and powerful change is the maturation of defined contribution plan design. Ten years ago, the Pension Protection Act made sweeping changes to our retirement system and ushered in a new era of automation that validated the use of autoenrollment, autoescalation, and investment defaults. Plans clearly have embraced this shift. In 2006, only 10% of Vanguard defined contribution plans used autoenrollment. Today, it’s 41%.¹
The reason for this rise is simple: Automatic enrollment boosts participation rates. Plans that use autoenrollment have an overall participation rate of 88%. Plans that don’t use autoenrollment see their participation rates dip below 60%.²
Within the autopilot framework, there are many levers plan sponsors can use to drive even better outcomes for participants:
- Could autoenrollment features be used to reenroll all employees?
- Is the default savings rate high enough?
- Should autoescalation be used? If so, at what rate?
- Which fund should serve as a qualified default investment?
Advanced analytics and reporting are helping answer these and other key plan design questions. This month, we’re completing our rollout of Vanguard My Plan Manager™, which will help plan sponsors spot trends across their plan and pinpoint pockets of participants who could use help reaching their goals. Benchmarking is built in, so sponsors can make peer-to-peer comparisons. When I joined the institutional business 30 years ago, this level of evidence-based decision-making was nearly impossible. Today, it’s a stepping stone as we continue to explore new ways to make data more meaningful for plan sponsors.
On the investment side of our business, data plays an equally important role. Investment committees face an increasingly complex landscape with more products, more regulations, and a low-return economic environment. Having access to robust research, analysis, and expertise is critical for investors trying to meet their institution’s investment objectives. My colleague Chris Philips recently compared this challenge to the TV show “BattleBots,” which I think is an apt analogy.
The competitive environment means investors need to use good judgment when constructing portfolios. Cost continues to be a primary driver of performance, and we’re pleased to see expenses continue their steady downward march. But the quality of the funds and the expertise with which they’re managed matter as well. Whether building an investment strategy for an endowment or constructing a DC lineup, institutional investors need access to investments that offer low costs, diversification, and skilled management.
Technology has contributed to some great advancements in how funds are managed—from sophisticated data analysis to efficient trade execution. Yet, it’s the people who continue to be the differentiator between good funds and great funds. One of Vanguard’s greatest competitive strengths is our investment teams’ experience, judgment, and skill in managing risk, optimizing portfolios, and executing trades efficiently. We take great pride in our consistent, long-term performance, with 93% of our funds outperforming their peer-group averages over the past ten years.³
We’ve come a long way in the institutional business, but we’re also excited about new progress already under way. We’re continuing to drive refinements in plan design and advanced analytics to help employers boost the effectiveness of their plans. And we’re leading the way in helping institutional investors build portfolios that keep costs low, maintain solid performance, and meet the specific financial goals of their organizations. It’s been a busy and productive year, and I can’t wait to see what the future holds.
¹Source: Vanguard, 2016. How America Saves 2016.
³This figure is the number of Vanguard funds (201 of 216) that outperformed their Lipper peer-group averages over the ten-year period ended June 30, 2016. Results will vary for other time periods. Only funds with a minimum ten-year history were included in the comparisons. (Source: Lipper, a Thomson Reuters Company.) Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all the investments are subject to risks. For the most recent performance, visit our website at https://institutional.vanguard.com/performance.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.