Joel Dickson: How America Saves

Our guest on the podcast today is Joel Dickson, global head of enterprise advice methodology for Vanguard. Joel oversees all investment methodology development for Vanguard’s advice programs, including Vanguard Personal Advisor and Vanguard Digital Advisor. Joel has worked at Vanguard for more than 25 years in a number of investment-related roles. He earned an A.B. from Washington University in St. Louis and a Ph.D. in economics from Stanford University. Joel can speak to a huge array of investment-related topics, but today he is here to discuss “How America Saves,” which is Vanguard’s annual report on the 401(k) plans it oversees and one of the best lenses into the state of American’s retirement preparedness.

Background

Bio

How America Saves

How America Saves 2023

“401(k) Auto Enrollment,” by Kat Tretina, forbes.com, Dec. 30, 2022.

“Target-Date Funds Have Normalized Workers’ Equity Allocations,” by Noah Zuss, plansponsor.com, April 10, 2023.

“Positive Signs in a Challenging Economy,” Vanguard.com, Feb. 3, 2023.

“A More Personalized Approach to Financial Advice,” by Joel Dickson, Vanguard.com, Sept. 23, 2022.

“SECURE 2.0 Offers New Wealth-Boosting Opportunities,” by Joel Dickson, Vanguard.com, May 9, 2023.

Other

“Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” by Brad M. Barber and Terrance Odean, The Quarterly Journal of Economics, February 2001.

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar Research Services. I’m filling in for Jeff Ptak this week while he is on vacation.

Benz: Our guest on the podcast today is Joel Dickson, global head of enterprise advice methodology for Vanguard. Joel oversees all investment methodology development for Vanguard’s advice programs, including Vanguard Personal Advisor and Vanguard Digital Advisor. Joel has worked at Vanguard for more than 25 years in a number of investment-related roles. He earned an A.B. from Washington University in St. Louis and a Ph.D. in economics from Stanford University. Joel can speak to a huge array of investment-related topics, but today he is here to discuss “How America Saves,” which is Vanguard’s annual report on the 401(k) plans it oversees and one of the best lenses into the state of American’s retirement preparedness.

Joel, welcome to The Long View.

Joel Dickson: Thanks for having me, Christine.

Benz: Well, thanks for being here. We want to know if you can start by discussing “How America Saves” at a high level—who do you write it for and what do you hope readers will take away from the report?

Dickson: “How America Saves” is really Vanguard’s flagship document and research around trends and current conditions in the retirement plan space and specifically the workplace retirement plan system and area. Vanguard recordkeeps directly about 1,700 employer-sponsored plans covering roughly 5 million participants, and “How America Saves” is really the documentation of their behavior, the trends, what plans are doing, and how that is driving investor outcomes and retirement success.

Arnott: This is the 22nd edition of the report, but the first one that you’ve published since COVID ended. How well did retirement participants withstand the pandemic? And do you see evidence of any lingering effects across any of the key metrics you track?

Dickson: Yeah, this is mostly a good news story and, in some ways, actually even somewhat surprising in some respects, which is that the typical retirement plan and retirement plan participant is extraordinarily resilient over the COVID period. If you look at the broader trends and overall statistics of retirement plan savings, you look across the different dimensions of what drives success like contribution rates. You have 85% participation rate among plans in the sample in the report. You have a total contribution rate north of 10.5% on participant balances. Then if you look at the investment choices, more and more you’re seeing a lot of single-fund investment in global diversified low-cost portfolios, specifically target-date funds, tailored to participants’ age and tolerance over time for risk to build their wealth and their savings. You’re seeing more and more decrease in those things that in the past people have pointed to and said, oh, that’s bad behavior on the part of plan participants. For example, only about 5% of participants now invest in multiple target-date funds. The average investor is only using about 2.4 funds to build their portfolio in their portfolio construction piece. So, they’re not doing this fund collection that we used to see a decade or so ago and not understanding diversification and clarity of investment portfolio.

The other big piece is that participant-directed trading has been at an all-time low. About 6% of participants made a trade in 2022. That’s down 4 percentage points, for example, over the course of the last decade. I think what all of this is reflecting is just the huge increase in innovation in the plan sponsor area around plan design that in many ways the signature kind of event was the Pension Protection Act of 2006, which has led to this tremendous rise in automatic enrollment of participants in retirement plans and included with that auto-escalation or increasing contributions over time by retirement plan participants. So, all of those things have showed just a tremendous amount of resiliency even in the face of—let’s not paper over it—the financial markets did not have a good year in 2022. And so, you see changes in balances, the dollar amounts that look negative, but the underlying behaviors that lead to retirement success about contributing and consistency and sticking to your plan come out in bright-green forms in the report.

Benz: Yeah, Joel, that’s a really good overview of some of the key themes. I’m wondering if you can talk about whether we can use this “How America Saves” report as kind of a lens into retirement preparedness in the U.S.? What does it show in terms of the retirement outlook for at least the retirement plan participants in the plans that Vanguard oversees?

Dickson: I’ll just highlight again to emphasize the point about retirement plan participation rate. The fact that 83% of eligible employees were enrolled in their employer’s retirement savings plan in 2022 across the Vanguard universe, that’s the strongest we have ever seen. Participating is the first step. If you’re not going to participate or you’re not going to contribute, there’s not a lot you can do in terms of meeting retirement sufficiency unless you happen to win the lottery. That participation rate is up almost 8 percentage points in the last decade. Again, a lot of that—and I’m sure we’ll get into this some more—is a reflection of really the auto-enrollment trend that I mentioned before coming out of the last 15-plus years.

I think the other important point is that the American retirement plan has dramatically evolved in recent years. Plan sponsors only continue to increasingly improve and innovate on plan design. In many ways, then the future of 401(k)s and the defined-contribution system continues to get more representative of the types of savings and approaches and personalization that can really be brought to improve retirement plan participants’ long-term prospects and outcomes.

Arnott: As in years past, the average participant balance is much higher than the median, meaning that large, well-funded investors are skewing the averages upward, even though most investors aren’t doing nearly as well. So, below all of the good news that you’ve mentioned and the positive trends that you’ve seen over the years, is there still something to worry about for those investors who still have relatively low balances?

Dickson: So, that’s one where it’s really hard in some aspects of the data that we see and publish in “How America Saves” to really draw that type of conclusion about balances and what that means for retirement sufficiency across some sort of, let’s say, demographic characteristics. The reason being that what we see with the plans is it’s the participants’ current retirement plan. So, as job changes occur, as they might switch employers and maybe one is a Vanguard plan and one is a non-Vanguard recordkept plan, or they rolled over the balance from a previous employer to an IRA—that’s outside of the data that we see from the retirement plans that we administer. So, a lot of times, the reflection of the difference between the average and the median balances is as much about the average person is in the plan about seven years in our database. But the average 43-year-old, which is also the median participant age, has probably been in the labor force since saving for retirement for more than seven years. So, we’re only really capturing that current plan assets. For those that have been at the same employer for most of their career, you’ll see a higher balance, all else equal. For those that have switched jobs or switched companies over time, you may see a lower balance but that might not necessarily be reflective of their retirement sufficiency or savings.

Benz: OK. That’s helpful, Joel. Before we delve into the study’s key findings, I’m wondering if you can give a thumbnail sketch of the typical participant. You’ve given us a couple of clues. You just talked about median age. But can you talk about amount of time, number of years in the plan, how much the average participant makes, and so forth so we understand what kind of folks we’re looking at here?

Dickson: I’ll define the average by the median value in most cases. So, 50% have more, 50% have less than generally the numbers that I’ll give you. And the first couple of these have been very consistent over time. The median participation age, it’s a 43-year-old. Pretty evenly split between male and female, a little bit more male in terms of the participants of the database, currently about 56% male. But the median tenure in their current job or what we see in the retirement plan data that we tabulate here, is seven years. That’s been very consistent over the course of the last, say, five to 10 years in terms of the data for this plan. You’re talking about median income, eligible employee income of about $74,000, $75,000 in 2022. That is higher due to inflation. It’s also a bit higher than, say, the median salary or income for U.S. households overall. So, it does skew a little bit more to the higher-income employees who happen to be eligible and participate more in 401(k)s generally.

And then, of that, what you see is, at least for the median participant that is in the plan, it’s a median income of about $82,000 with median nonparticipant income of about $42,000. So, you can see that gap between participation, for example, and I’m sure we’ll get into that some more, and that’s actually something that this auto-enrollment trend that we’ve talked about has really seen a sharp increase in lower-income participants really coming into the plan and saving. That’s been the biggest participation change if you look at income levels. But that’s kind of the typical participant. I would also say the typical participant—and it goes back now to a stat that I gave before—the typical participant is actually in one fund, and that is a target-date fund in terms of their investment options, because now about 59% of the participants that we see are in a single target-date fund for their investments in the plan.

Arnott: Yeah, and I’d imagine that that’s a positive thing in terms of better investment outcomes and as you mentioned, more reasonable asset allocations relative to age and things like that.

Dickson: Absolutely. One of the other things that we see quite a lot is this change in what we would call kind of extreme asset allocations or extreme equity allocations. If you go back prior to the Pension Protection Act or even just shortly after that, which introduced these default options in a safe harbor-type way for plan design, we saw numbers—and this is in the report—historically of greater than 10% of participants had absolutely zero equity exposure and somewhere between 15% and 20% of participants had 100% equity exposure in terms of their plan asset allocations. Today those numbers are 2% on the zero side and 5% on the 100% side. So, that was the contributions of 2% and 5%. In terms of the balances, it’s 3% and 4%—3%, zero, 4%, 100%. So, that really reining in of these extreme equity allocations for a more balanced, we think, age and tenure kind of appropriate asset allocation, is one of the really striking features of what’s happened over the course of the last 10 to 15 years.

Arnott: So, going back to automatic enrollment, which you mentioned has been a pretty significant trend, around 60% of the retirement plans you studied, automatically enroll participants, which still seems maybe surprisingly low given the benefits of automatic enrollment. For example, your data also shows that the participation rate in plans with auto-enrollment was 93% compared with only about 70% for plans that lacked it. So, given that pretty convincing difference in participation rates, what would explain a plan sponsor’s reticence about adopting automatic enrollment?

Dickson: I think there are a couple of things. This has been a journey, if you will, in plan design on the 401(k) space over the course of the last 10 to 15 years as we’ve seen steady, steady increases in auto-enrollment. So, I think the impediments or the reticence that exists with the relatively smaller percentage of plan sponsors today than had been recently are still the same, which is that there are questions often about cost—the cost to the plan sponsor of providing the benefit that could make auto-enrollment a strain on the company’s finances. That said, when we look at the characteristics of employees who would not necessarily enroll in a plan on their own, we find that automatic enrollment typically adds lower-paid employees to the plan. So, the cost exposure is somewhat less than is often sometimes expected. Also, those that have or are in industries or have businesses where there’s a higher turnover of employees may worry about the cost and administrative aspects of enabling auto-enrollment for new employees. However, there are solutions that can also mitigate those new costs, such as how to think about match-eligibility timing, vesting schedules, and so forth.

The second area that sometimes we hear about is that some plan sponsors simply don’t think their workforce needs automatic enrollment. Maybe they think they have a more sophisticated, well-informed, financially literate base of investors. So, that kind of highly engaged workforce in their own financial success sometimes leads employers to not have auto-enrollment. We see this sometimes with some professional organizations. You think about the doctors and the lawyers’ groups and so forth that sometimes will think through and say, you know what, everyone is pretty engaged with their own investment approaches and have their own opinions. So, sometimes you don’t see auto-enrollment in some of those cases.

Finally, I think the third area is that some plan sponsors just have a philosophical piece where they don’t want to force employees to save for retirement or make their employees feel like they’re pressured to participate. Employees may feel that automatically enrolling employees into a retirement plan is an overreach of their employer responsibilities or approach. But I guess I would say more than three and four employees with at least 10 years of tenure participate in a voluntary enrollment plan suggesting that inertia is likely at play in employee retirement savings behaviors. Employees often need a nudge like auto-enrollment to start saving for retirement.

The other thing I would just add along those lines is really only 7% of employees in auto-enrollment plans opt out. By the way, and this is one of the other trends that we’ve seen more and more, is the majority of plan-design auto-enrollment defaults participants to an initial contribution rate of 4% or greater. That’s a significant change over the last 15 years or so where the predominant default contribution rate was about 3% historically. You see almost no change in employee opt-out rates with higher default contribution rates. So, as a perspective on increasing contributions into the 401(k) savings plan, higher default rates are showing a lot of ability to accomplish that at least on that dimension. Those are the overall trends and when there’s resistance about adding auto-enrollment.

I would add though to this, I think there’s also some recognition, and you see this in the data of voluntary enrollment participation rates, which still as you had mentioned, instead of being 93% if it’s auto-enrollment, it’s 70%, but that 70% participation rate on the voluntary enrollment is significantly higher than it was a decade or so ago. So, you’re actually seeing quite a lot of people engaging, a greater increase of people engaging in their retirement plan when the voluntary enrollment is in place. Whereas the auto-enrollment has been pretty steady and very successful obviously of participation rates in the low 90% range.

Benz: We just want to follow up on some of those themes, but I want to stick with this auto-enrollment. It looks like about 40% of plans that offer the combination of automatic enrollment and automatic escalation, which means that the plan mechanizes increases in contributions. That’s about 40% of plans that offer both of those. How do the deferral rates and retirement balances of participants who are both auto-enrolled and auto-escalated compare to plans where those features aren’t in place?

Dickson: This is where it gets into if you’re a participant in the plan you’re tending to see total contribution rates relatively similar across the different plan designs. It’s just that you’re getting much more participation in the auto-enrollment pieces. It’s interesting because we actually have a chart in the work that shows how participants are changing their contribution rates or their deferral percentages, their elective deferral percentages. About 25% of participants—and this has been pretty constant over the last few years—about 25% of participants end up increasing their deferral rates annually because of the auto-enrollment, auto-escalation feature that’s included. Another roughly 15% or so increase their contribution rates on their own in a given year and that also has been relatively consistent over time.

There are a few, about 5% or so that may decrease their contribution rates in any particular year, but the net of both the voluntary increase in contribution rates and the automatic-escalation just shows that over time that’s where you’re getting additional retirement savings into the plan. That’s another thing that’s hidden, if you will, in the account balances because of the job-change tenure issue, which is that you’re only seeing that current plan and that current trajectory. You’re not necessarily seeing that total balance that may have been reflective of increases or contribution rates at previous employers, previous retirement plans.

Arnott: Another interesting trend you found is the gradual increase in the percentage of plans that allow participants to begin contributing on day one, the first day that they start with their current employer. It’s up to 72% of all plans. What has made plan sponsors more amenable to immediately enrolling participants?

Dickson: That’s another one where you talk with plan sponsors, and they again have somewhat different approaches. There’s certainly been this trend that the earlier the better. Take advantage of compounding, get the retirement savings going, and that’s really one of the big benefits of the auto-enrollment, and then the matches and rules around access to money and contributions and investing and so forth that gets there. So, it’s certainly been that trend of somewhat increasing day-one access as you’re saying. I think that’s just, in many ways, a demand issue from plan participants and being able to compete on plan features in many ways in this environment. It’s been another part of that evolution of plan design that we’ve seen consistently over the course of the last decade.

Benz: So, zooming out a little bit, I was wondering, Joel, if you could talk about the toughest choice that plan sponsors make as they’re setting up their retirement plans and thinking about their participant space, and maybe you can talk about the toughest choice that you think they make and how that shows up in the data in “How America Saves”?

Dickson: I think the toughest choice in many ways is how do you set up the plan to serve your particular employee base and participants. So, what’s the right retirement plan for your company is the question that most plan sponsors ask. Because of difference in demographics, and industry and turnover rates, and professional versus hourly or managerial—all of those things can lead to differences in thinking about how to structure the benefits of the plan. Some companies are trying to attract in-demand talent. Others are looking to their retirement plan to make them stand out. Others are focused on staying compliant and catching up to the changing standards like, for example, SECURE 2.0 landscape and a broader range of issues that their employees may be facing.

I think the toughest choice though ends up being less about the retirement plan and more about the company itself and the value proposition it wants to offer employees. We work with plan sponsors. We have a whole strategic consulting group to think about plan design and approaches that best meet what is appropriate for a particular client’s situation, or a particular employer’s situation, and how they want to design the plan that covers things like what are the different features, whether it may be contribution types like Roth and aftertax and pretax, how you think about your match, how you think about your investment options, auto-enrollment, auto-escalation, and how you think about even things like withdrawal provisions and strategies and options that can be tailored to the employee base.

One of the biggest places that we’re seeing this manifest itself of late, and it’s still a trend that we think is really taking hold a little bit more, it’s this whole concept of personalization. So, employers are trying to think about personalizing the plan, if you will, for the average type of employee that they have. But that’s still a, how do we think about our employees on average? And what we’re seeing is more and more tools and plan options being focused on individual or personalized characteristics. We’re seeing this with some of SECURE 2.0—changes like more focus for emergency savings, which may be an issue on lower income and also younger ages. You may see this with student loan-matching provisions that are coming into play, again for a different plan participant that is trying to save in a different way, mainly by drawing or by paying down some of their debt that may be hanging over them. And then you see it in things like advice, where you can get better outcomes if you can personalize the experience and the approach tailored to a particular participant’s goals, objectives, and characteristics. Then how you use the plan and the different features, different investments, different savings can really extract even more value and improve investor outcomes over the long run.

Benz: It’s been my perception that there’s this bifurcation in terms of 401(k)-plan quality where very large employers are offering all the bells and whistles and they may be well ahead of the curve on this, say, personalization that you just talked about and then you have smaller employers where the 401(k) plan is like a very side job for someone who has a lot of other obligations and it’s not something that they’re able to spend a lot of time on and they may not have the money to make it a really solid plan. So, I guess the question is, is that a fair characterization of the marketplace and then also is that getting any better from where you sit?

Dickson: I certainly think there has been this—it was not just a perception but a reality of very material differences historically on, say, smaller plans versus larger plans and by that I mean differences in participation rates, difference in contribution rates, differences in investment costs and options, and those elements have really in many ways narrowed over the course of the last decade or so. And again, I go back to this ability to scale where it might be record-keeping costs in certain cases, where it may be able to bring different employers together in plans, where it may be just the evolution of the industry serving, in a competitive industry serving these plans, with auto-enrollment that can be done in many ways a bit more scalably that at least in terms of investment cost and plan design and investment options and if you think about low cost, globally diversified, age appropriate, risk-appropriate investment options—in many ways we’ve seen a convergence of what was best practices in the large plan space a decade or so ago really coming more and more down market into the smaller plan space. It’s still not there for the very small firms where some of the administrative costs may be a little bit high, but we’re seeing more and more of it in the access to low-cost investment options through automatic enrollment, and being able to scale that for employers has made a marked difference in outcomes for employees in smaller plans.

Arnott: That’s helpful. So, we’d like to switch gears and ask you a few questions about trends among plan participants. One of the findings of the study is that the median participant is deferring about 6.4% of take-home pay and if you add the employer match to that, you get a total contribution rate of about 10.6%. Is that high enough for someone to build a secure retirement and what are some of the barriers to encouraging plan participants to contribute at a higher rate?

Dickson: So, I guess I’d say it’s close—in terms of the savings rate. We normally would say that if you want to maintain a similar standard of living over your working and retirement years in terms of spending capacity, if you will, or consumption that you probably want to save, say, between 12% and 15% of your pay and that would include both your own contributions plus anything that your employer might put in the defined-contribution plan. With an average total contribution rate or typical contribution rate of as you had said about 10.6%, not too far off. But we see actually a fairly large proportion of folks at or pretty close to that figure of 12% to 15%, and really, we see about 20% of participants maybe just needing to boost their savings by say 1% to 3% to hit target savings rates. And that’s where features such as auto-escalation and advice, whether it be through plan design, or nudges, or even potentially managed account guidance and approaches, can really help participants recognize when it’s an appropriate time to allocate more pay toward their retirement journey.

I think there’s been a lot of focus—some of this is tools, and calculators, and education. But certainly, when you’re in a managed-advice approach, there’s much more of a focus on not so much what your account balance is but whether you are on track or not to have retirement sufficiency, if you will, when you retire based on things like your retirement age, how much you’re saving, how you might claim Social Security, all of the financial-planning features in addition to the asset allocation that is often provided by the fund option or the plan options. But putting those together in a service or an approach that focuses on do you have enough for what your goals and objectives are—just having that discussion can be very helpful and gets people somewhat more confident than just looking at the variation of the account balance, for example, on a day-to-day basis where you see something like 2022 and you go, wait, am I still on track or not? But if you’re contributing at the rates that we’re seeing by and large and that the retirement plan is providing you that access to good investment options and you’re using them well and contributing at a pretty good clip, then you’re on track regardless of the month-to-month, year-to-year kind of movements in the financial markets.

Benz: So, Amy just mentioned contribution rates. I want to go back to participation rates and go back to this idea of plan size because the report does note a pretty significant difference in participation rate by plan size where the people in the smaller plans are participating at a lower rate than is the case for people in larger plans. Can you talk about why that might be and is that getting better?

Dickson: That has also gotten better over time—again, this view of auto-enrollment. But there’s still a little bit more to do from that auto-enrollment perspective. All else equal, some of the smaller employer plans have voluntary enrollment in larger percentages, so you’re seeing some of the manifestation of what we talked about before, which is that just naturally the participation rates are lower in those types of plans. So, I think it’s really just a reflective of the continued growth and bringing down market, if you will, that best-practice, best-in-class plan design that would include more auto-enrollment at a certain contribution level to get that entirely throughout the system.

Arnott: So, we’d like to switch gears again and talk a little bit more about investment choices and the choices that plan participants are making within the plan. You mentioned earlier that you’re seeing fewer cases of extreme equity allocations where people have either 0% of their assets in equity or 100%, and one of the most striking visuals in the whole study is a chart where you group participants by age and then show their average equity stake as of four different points in time—2005, 2010, 2015, and 2022. Can you expand on what story does that chart tell and what makes it important?

Dickson: So, this in many ways is a great example of the impact of the auto-enrollment and the use of a balanced age-appropriate asset-allocation fund for the default options, because what looks now today on that chart, for those that—I know everyone has the report in front of them, but it’s figure 84—that chart looks a lot like a typical target-date fund glide path. Higher equity allocation when younger, trending down over time to where you get, by the time you’re in early retirement, probably about 50% equity exposure. What’s interesting, though, is that where we’ve seen the change in equity allocation over the course of the last, say, decade and a half has been almost all within those participants 50 years older or less, and in particular those 35 years older or less, where you look at, say, 2006-07 and that group of 35-year-olds or younger were in the, say, 65% to 70% equity range, really not that much different than somebody in their late 50s, early 60s at that point in time. So, a 30-year, if you will, flat asset-allocation profile in many ways.

What you see today is those that are 35 years or younger have equity allocations that are right around 90% and for somebody that has the capacity of time, we would say that that is a more appropriate allocation as you think about long-term retirement savings and having exposure to risk premia, in this case equity-risk premia, that can at least expected to—not guaranteed but expected to—augment your contributions in terms of building wealth. One of the things that comes up is when you think about long-term goals, say you’re saving something for 30 years, on a 30-year basis, investment returns are certainly important, but contribution rates are also about equally important. In terms of the final balance 30 years from now, roughly half of that will probably come from your contributions that you make and half of that expected to come from investment returns from a broadly diversified balanced-type approach. That’s very different than shorter-term investment goals. Let’s say you’re saving for something five years from now, even 10 years from now. In those cases, the breakdown between how much you have to save—the contributions versus how much you might get from investment returns—is much more skewed to like 80% contribution, 90% contribution of your total balance is going to be the amount you save, not the investment return. I think sometimes people don’t realize that. That’s where it’s really important for long periods of time, get it in early, get the compounding, again at least in the expected terms. Half or more of what you will have at the end is likely to be from that investment return piece of it. Though you can’t get the investment returns unless you contribute. That’s why they both work in tandem and that’s why it’s in many ways really encouraging both dimensions from this report. Good contribution rates—they can be a little bit better—but good contribution rates and good investment choices and selection, are setting people up at least on the right path.

Benz: I’ve gotten kind of obsessed with the equity allocations by women versus men and it’s interesting to observe the changes and looking at this report—the most recent report—showed that women’s average and median equity allocations were right in line with men’s, but it seems like that hasn’t always been the case. So maybe you can talk about what is driving the trend toward men and women assuming similar levels of equity risk. I’m guessing it goes hand in hand with the uptake of target date, but I want to hear from you about that.

Dickson: Absolutely, Christine. It goes to the uptake in target-date funds and the auto-enrollment piece of it because where we see this biggest increase, as I had mentioned earlier, is in those younger ages and I’m going to flip that a little bit, which is to say, where you see the decrease in equity exposure is at the older ages and right now the labor mix, we do see 54% of our sample being male or 55% somewhere in that range, but the characteristics there when we look at labor force evolution, who’s in the labor force at different ages and so forth, you get a bit more of a balance between male and female at those younger ages and that is with the target-date funds and the great increase in equity allocation there, you’re definitely seeing—and I know, Christine, you and I both know about Barber and Odean studies and looking at risk-taking male versus female, trading activity male versus female. By the way, we definitely still see that men trade a little bit more than women in the data, but their overall asset allocation, and if you will, their risk tolerance or risk appetite has definitely converged over the last decade. And you mentioned it, and in fact, the specific numbers if you look at the median equity participant-weighted percentage by gender, it’s 86% equity for both male and female, and then if you just look at the average equity weight, it’s within a percentage point, so it really is showing that and if I drill down one level deeper though, you do see a few differences in how the equity amounts are allocated between men and women in our sample.

In particular, target-date funds are held more by women in terms of the percentage of their allocation. So, for example, the equity piece coming from target-date funds is about 43% of that 76 or 78, if you’re talking about the average or the median. Let’s talk about the average for a moment. So, about more than half is coming from the target-date fund allocation. Whereas for men, it’s a little less than half that comes from the target-date allocation in terms of the total equity exposure. Instead, men tend to hold a bit more in individual diversified equity funds than women do. It’s a little bit at the margin, but in the grand scheme of things in terms of total equity allocation percentage, women tend to take a little bit more advantage of target-date fund investments and that the equity percentages offset, if you will, in terms of how men and women invest so that they end up at the same total number roughly.

Arnott: Sticking with the theme of gender differences, you show account balances for men and women in the same income range, and women consistently have lower balances across all of these income bands. Do you attribute that to women maybe often having less time in the workforce if they take time off to raise a family or spend a few years working part time, or are there other factors at play between the difference in account balances?

Dickson: Yeah, I think there are a lot of different aspects going on there. Certainly, as you said, the data show that there is a difference in balances. However, in other research that we published and what shows also here is that if you look at things like participation rates and contribution rates, they look very similar by income band, by age when you look at gender differences there. If anything, women have tended to have higher participation rates across all income levels and men have slightly higher savings rates when compared with women, but that’s really just at the lower income levels. If you look at the higher income levels, women if anything have had somewhat higher savings rates, at least in this report.

So, I think it ultimately does come down to one of the biggest differences there is that contribution rates and balances increase with income. So, that caregiving aspect that oftentimes lots of research has shown that women will need to temporarily leave the workforce, whether it’s taking care of parents or children, whether it is reducing their hours or going part time that’s more prevalent there. All of that has an impact on retirement savings over their working careers. So, what we’re seeing with the snapshot at a point in time is current income and current balance. That’s not necessarily capturing these shifts in and out that may be occurring for women in the workplace or the income differences when we look at bands that may have been during the course of one’s career. At least though in holding current income, constant or consistent, you see much less difference in terms of those things like participation rate, contribution rate, and so forth. But it definitely still manifests itself in balance differences throughout the data.

Benz: I wanted to switch over to ask about managed accounts and I’m hoping you can first explain what that is and how that would be different from, say, a target-date fund. But you show in the report that 77% of all plan participants were offered some kind of a managed account. That’s a lot higher, 20 points higher than it was even five years ago. So, first, what is a managed account and second, why are they so much more prevalent today in your view?

Dickson: So, a managed account would be basically providing advice in the course of the plan. So, access to a professional that will build a portfolio, provide recommendations, and not just about the investment options but maybe about how much you should be saving, how you should be thinking about other financial planning, whether you’re on track to meet your longer-term retirement goals. So, these managed accounts can also be set up as default options, although that’s not that common. But there are managed account approaches really to take that personalization to improve outcomes for those clients who could benefit from a more personalized tailored perspective on their finances and their accounts. So, it’s really in many ways specific to adoption of advice and plans more broadly that we’re witnessing an increased demand for such services connected to things like accessibility, affordability, and awareness and just managing overall.

When you think about accessibility, the perception of financial advice probably a decade ago, whether it was digital or through a human advisor like a certified financial planner, it was thought to be reserved for the wealthy. More and more you’ve seen those barriers being removed and plan sponsors implementing advice programs into 401(k)s is exactly proving that point that participants can now have access to such programs seamlessly through their employer plan. Affordability of that is key though, which is really—and we’re trying to do this from an overall Vanguard standpoint—championing the advice marketplace through a spectrum of low-cost high-quality services and approaches. And then just awareness and that being investors recognizing that they may not have the time or willingness to go it alone in terms of a do-it-yourself perspective and that there are solutions to take the obligations off of them.

So, when you talk about the uptake of participants in recent years, 7% is still fairly small. It’s been relatively constant for those that are eligible, but we are starting to see more and more interest from a plan design standpoint from plan sponsors in helping their clients think about their retirement journey over their lifetime, not just their employment journey. That’s really leading to a lot of interest at the plan sponsor level. When we look at who is taking advantage of these services, these managed account options, the median age is a little bit higher, average account balance is a little bit higher as well as current income. As they grow, as their financial needs may grow more complex, they may value that guidance and support whether again it being digital or through a financial advisor, a human advisor. So, there’s a lot of things there around personalization and especially going beyond asset-allocation solutions that can really matter and make a difference in one’s retirement outcomes.

One example of this is—and it’s something, Christine, I know you talk about quite a bit at times—which is, you think about how you claim Social Security once you enter retirement. That choice can make upward of $100,000 of a difference in terms of retirement wealth in present value terms. And then how you think about balancing these different legs of the retirement stool between your own financial savings versus Social Security versus you may have other sources of income as well in retirement. Getting that balance right so that stool isn’t as wobbly is one significant way that advice can really benefit participants in a plan.

Arnott: So, it looks like we’re a little bit over time here. Do you have time for just one more question? Or do you need to be somewhere?

Dickson: Sure, I’d be happy to.

Arnott: You mentioned providing advice on timing for starting to take Social Security. Are there other things that plan sponsors can be doing as their plan participants get older and start to either approach retirement age or actually retire? For example, are you finding more plans being interested in developing tools or other services for retirement income and spending plans?

Dickson: There’s certainly a lot of discussion about that, and in fact, there’s been a bit of a trend. We don’t see it that much in the data. You see it a little bit in some of the rollover data versus staying-in-plan pieces—assets that are staying in plans is increasing a bit over time. You’re seeing interest there in terms of how do you think, as I mentioned before, about the retirement journey as opposed to just the employment journey. There is definitely interest in different tools, approaches, calculators, yes. But a general look at retirement sufficiency and how you think about the retirement income piece of that, which is actually pretty complex when it comes down to it, which is why advice can play a pretty significant role in that space because there are so many integrated considerations to think about from that standpoint.

What I would say, though, is I also think this is an area where there’s some learning from the retirement plan space, the workplace retirement plan space, that can and really should be taken outside of the workplace retirement plan landscape, but that is still within the context of retirement plan savings and retirement sufficiency. I’ll give you a specific example. Automatic enrollment, which we show time and time again, has had significant improvement in investor outcomes and perspectives, at least based on the data that we have published and seen. There’s not really that same concept when it comes to rollovers. So, there isn’t a default target-date fund or balanced-age-appropriate kind of perspective in the IRA rollover space. So, what we see is that when assets leave plans and roll over, oftentimes there is a significant decrease in the, we were talking about equity percentages overall among participants. You end up seeing much lower equity percentages. In particular, you see much higher cash percentages from rollover activity and transitions from plan to IRA, whether it be at retirement or at job change. That’s a significant potential drag on long-term retirement outcomes.

So, I think there’s actually some things that we as an industry can really think about, about how plan design and how plan sponsors have figured out some best practices and approaches that can really drive investor outcomes and think about how those might be applied more broadly in the retirement plan landscape. I think that’s a great opportunity for the coming decade overall.

Benz: Well, Joel, there’s been so much great food for thought here. You provided so much great food for thought. The report certainly has a lot of great information, too. Thank you so much for taking time out of your schedule to be with us today.

Dickson: It’s been great. Christine and Amy, thank you very much for having us.

Arnott: Thanks for taking the time to talk to us.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)