In June 2017, Vanguard published its 16th edition of How America Saves, a comprehensive report that analyzes the retirement savings behavior of more than 4 million plan participants. Also in June, Vanguard issued the inaugural edition of How Australia Saves. This report was a collaboration between Sunsuper, one of Australia’s largest multi-industry superannuation funds, and Vanguard.

The retirement systems in the United States and Australia are different, but both have defined contribution (DC) systems. On the contribution front in the United States, retirement saving is voluntary and there’s no requirement that employers offer or employees contribute to a retirement plan. Yet in Australia, retirement saving is mandatory and employers are required to contribute 9.5% of wages to a superannuation fund on behalf of their employees. Employee contributions are voluntary. Also, U.S. employees with a retirement plan are called participants, and in Australia these individuals are referred to as members.

Both DC systems designate default investment options. In the United States, the dominant default investment option is a target-date fund. In fact, 46% of How America Saves participants are solely invested in a single target-date fund. The default investment option for the members analyzed in How Australia Saves was a life-cycle option, and 83% of How Australia Saves members were solely invested in this option. The life-cycle default option maintains a growth allocation of about 75% until members reach age 55. Then the life-cycle option begins to become more conservative. In Australia, like in the United States, members can also construct portfolios from a range of investment options offered by the superannuation fund.

Both participants and members solely invested in the default investment option have investment outcomes, as measured by five-year annualized total returns, in line with the performance of broad-market indexes.

Professionally managed allocations have reduced the dispersion of risk and return

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Here’s where it gets more interesting. Compare the outcomes for “default” investors with the outcomes “do-it-yourself” participants and members realized over the same period. The results for self-directed participants and members are more broadly dispersed. In some cases, these investors achieved higher annualized returns and/or lower volatility. More commonly, they had lower annualized returns or higher volatility, and sometimes both.

Professionally managed allocations have reduced the dispersion of risk and return

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When it comes to investing, people behave in similar ways the world over. We value having lots of investment choices. Yet, when we decide to tackle the portfolio construction task, we take a risk. The data shows that many of us could be better off if we let the investment professionals construct our portfolios for us.

¹Source: Vanguard, How America Saves 2017Note: U.S. stocks represented by the MSCI US Broad Market Index; U.S. bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index; International stocks represented by the MSCI All Country World Index ex USA. Includes 1,000 random sample of participant accounts drawn from respective samples. Excludes 0.5% top and 0.5% bottom outliers for both risk and return, for a net sample of 980 observations. Vanguard defined contribution plan participants for the five-year period ended December 31, 2016.

²Source: Vanguard, How Australia Saves 2017. Note: Australian shares represented by the S&P/ASX 300 Index; Australian bonds represented by the Bloomberg AusBond Composite 0+ Yr index; International shares represented by the MSCI World ex-Australia Index. Includes 1,000 random sample of participant accounts drawn from respective samples. Excludes 0.5% top and 0.5% bottom outliers for both risk and return, for a net sample of 980 observations. Vanguard defined contribution plan participants for the five-year period ended December 31, 2016.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Past performance is no guarantee of future results.
  • 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.