Trends in retirement investors' behavior

Participant investment decisions play a crucial role in long-term retirement savings growth, and a new report from Vanguard helps to examine recent trends in investors’ behavior and how it impacts their retirement portfolios.

Retirement plan data from 5 million defined contribution plan participants across Vanguard’s recordkeeping business shows that investor preferences have changed in recent years, according to How America Saves 2022, a Vanguard report released in June.

Dramatic improvement in portfolios

For instance, Vanguard said that portfolio construction for participants has improved “dramatically” during the past 15 years. In 2005, just 39% of participants had a balanced strategy. By 2021, that number had risen to 78%.

In 2005, 13% of participants held no equities and 18% had more than 20% of their portfolio allocated toward company stock – those numbers were down to 3% in 2021.

As expected, participation rates are much higher in plans with automatic enrollment (93%) than in plans with voluntary enrollment (66%). Meanwhile, employee-elective deferrals have remained largely steady during the past decade, according to Vanguard. The median deferral rate was 6.1% in 2021. When both employee and employer contributions are considered, the median total participant contribution rate last year was 10.4%, which shows a slight increase over the past five years.

Despite plan sponsors often providing a large menu of investment choices, Vanguard said most participants keep it simple. In 2021, 61% of participants used just one fund. Vanguard participants used 2.4 options on average in 2021 versus 3.1 options in 2012.

“One reason for this change is the growing number of single target-date fund investors. Of the 61% of participants who held a single-fund option in their account in 2021, 92% were invested in a single target-date fund,” the report said. “Since 2012, the percentage of single-fund investors holding cash investments has declined from 14% to 4% due to the growth of automatic enrollment, the availability of target-date funds, and a shift in default fund designations by employers.”

Participants across income levels carry similar equity risk

The growing popularity of target-date funds and automatic enrollment has affected asset allocation by participant demographics. For years, higher-income participants assumed more equity market risk on average than lower-income participants, but today participants across income levels carry similar equity risk, according to Vanguard.

At the median, overall participants allocated 87% to equities. Allocations did vary by age. Participants younger than 45 had about 90% of plan assets invested in equities in 2021 compared to a median equity allocation of just 45% for participants older than 65. Another demographic difference was that participants who built their own portfolios skewed older and longer tenured with higher balances, while investors in single target-date funds were shorter tenured with lower balances.

Account balances for Vanguard plan participants fared well in 2021, bolstered by strong equity markets. Participants’ average account balances saw an increase of 10% during the year. The average account balance for Vanguard participants was $141,542, while the median balance was $35,345.

Just 8% of participants in defined contribution retirement plans traded within their accounts in 2021. That aligns with an ongoing decline in participant trading that Vanguard has seen over the past 15 years. The report attributes the decline in part to participants’ growing adoption of target-date funds, noting that just 3% of the participants who hold a single target-date fund traded at all in 2021.

Vanguard said 86% of all defined contribution plan participants held a balanced fund. Of those participants, 82% opted for target-date funds. Only 1 in 6 participants used a large-cap U.S. equity index fund, though 94% were offered that option. Similarly, 1 in 5 participants opted to hold a bond fund, 1 in 7 selected a money market or stable value cash investment and 1 in 5 held a stand-alone international equity fund. Emerging markets funds were available to about one-third of participants, but just 9% chose to invest in one.

Loan usage below pre-Covid levels

The report found that loan use remains below pre-COVID-19 levels, as 13% of participants had an outstanding loan in 2021 versus 16% five years ago. The average loan was approximately $10,600. Meanwhile, those plan participants who left their jobs in 2021 tended to keep their retirement assets rather than draw on them.

According to Vanguard, approximately 25% of participants separated from service in the current year or prior years and could have taken a distribution from their retirement account. Eighty-three percent of those participants either remained in their employer’s plan or rolled over their savings to an IRA or the plan of their new employer. Ultimately, 98% of the plan assets in those scenarios available for distribution remained in the plan while just 2% were taken out.