I love Dr. Seuss. Two of my favorite Seuss characters are “Thing One” and “Thing Two,” energetic creatures who spawn mischief and merriment wherever they go. Seussian blogThey just make me smile!

So, what do Thing One and Thing Two have to do with defined contribution (DC) plan design? For those of us counting on DC plans for our retirement security we only need to get two things right. “Thing One”—we need to save enough. And “Thing Two”—we need to invest appropriately.

Sounds simple? Unfortunately for many individuals who rely on DC plans, it’s actually not so simple and many participants aren’t getting it right.

Let’s tackle “Thing One”—saving rates—first. Most DC plan participants should target a savings rate of 12% to 15%, or more.1 This target includes both participant and employer contributions to the DC plan. In How America Saves, our analysis of U.S. DC plans and participant behavior, we calculated the number of participants who have attained their target savings rate. Sadly it is only 35%.2 Therein lies the potential mischief.

How do we get more participants to reach appropriate saving rates? How do we help more people understand the need to save more? Plan sponsors should communicate the saving-rate message to plan participants. Nudging participants through auto-enrollment and auto-escalation can also boost saving rates, especially for younger employees. Learn more here.

“Thing Two”—investing—is more promising. Over the past decade, huge improvements have accrued to “Thing Two.” Seven in ten participants held balanced portfolios and 4 in 10 were solely invested in a single target-date fund at the end of 2015. By comparison, at the end of 2006 only 4 in 10 participants held balanced portfolios and only 4% of participants were solely invested in a single target-date fund.3 Hence, the encouraging merriment. Participant investing has dramatically improved and we expect more improvement in the future.

I wish Theodor Seuss Geisel were still alive. Wouldn’t it be fabulous to have him write a children’s book featuring “Thing One” and “Thing Two” on the importance of saving and how to invest successfully?

The most important “Thing” is actually “Thing One,” the saving rate that will ultimately determine the security of our retirements. Fortunately, due to the rising use of target-date funds, I’m not as worried about “Thing Two” as I am about “Thing One.”

So, learn from the data,

the good and the not.

By saving much more,

you’ll have more than you’ve got!

 

Notes:

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.

 

[1] How America Saves 2016, The Vanguard Group, Inc., 2016, https://institutional.vanguard.com/iam/pdf/HAS2016.pdf

[2] How America Saves 2016, The Vanguard Group, Inc., 2016, https://institutional.vanguard.com/iam/pdf/HAS2016.pdf .

[3] How America Saves 2016, The Vanguard Group, Inc., 2016, https://institutional.vanguard.com/iam/pdf/HAS2016.pdf