While the market swings caused by Covid-19 sent many investment professionals running for cover, and encouraged many amateurs to flood into falling stocks, retirement plan participants did neither.
According to a recent report from Vanguard, the mean retirement account balance lost 4%, going from $106,478 to $101,771, with the median account balance dropping from $25,775 to $25,570, just 1%, between January and the end of April, when most major stock indexes were still down by double-digit percentages for the year. In fact, in a period where many investors lost money, two-thirds of Vanguard’s retirement plan participants saw their account balances rise on a year-over-year basis for the 12 months ending on April 30.
Vanguard updated its annual How America Saves report with data from its retirement plans from the first four months of 2020, concluding that automation and simplified investment options have led to superior investment outcomes for plan participants.
The adoption of target-date funds within retirement plans has been particularly effective at reducing inexperienced investors’ tendency to pursue extreme allocations—portfolios holding all equities or no equities—within their accounts. Since target-date funds were allowed to be qualified default alternative investments in retirement plan accounts in 2006, the proportion of participants using extreme allocations in their portfolios has been reduced by three-quarters.
During the first four months of 2020, fewer than 2% of target-date investors traded within their portfolios, a rate five times lower than other Vanguard investors, and less than 1% of Vanguard’s plan participants abandoned equities through a trade, the report said. The company believes that the increased adoption of target-date funds is driving this more hands-off behavior among plan participants.
Six out of every 10 dollars contributed within retirement plans in the first four months of 2020 flowed into target-date funds.
Automatic enrollment has also led to higher average savings rates and participation, according to Vanguard, with automatically enrolled employees 30% more likely to participate in their employer’s plan than employees offered a plan with voluntary enrollment. Total savings rates for automatically enrolled employees reach an average of 10.3%, compared to 6.6% for employees in plans with voluntary enrollment.
Vanguard also found that a higher default saving rate generally leads to higher overall savings rates while having no measurable impact on the number of individuals who opt out of saving within retirement plans.
But Vanguard did see some evidence of increased trading among participants not using some type of managed account program. Among these participants, 5.3% initiated an exchange during the first four months of 2020, compared with 2.9% for the same period in 2019. However, less than 1% of these plan participants “panicked” and abandoned their equity allocations, the report said.
However, plan participants made comparatively few changes in the first four months of 2020. Both participation and deferral rates remained steady. Vanguard argues that automatic enrollment and default deferral rates played a role in the relative calm exuded by plan participants, but that a more long-term focus among retirement investors may also be a factor. The median account balance among its 401(k) participants increased 71% between April 2015 and April 2020.