Are retirement plan participants making appropriate investment decisions? Increasingly, they are, with the help of key plan-design enhancements adopted by plan sponsors. That’s according to How America Saves 2023, which tracked the saving behaviors of nearly 5 million defined contribution (DC) plan participants across Vanguard’s business.

"When you look at the average equity allocation of retirement plan participants by age—and we have data going back to 2005—there is a clear trend toward improved age-appropriate equity allocations," said Jeffrey W. Clark, lead author of the report and a member of the Vanguard Strategic Retirement Consulting team. "In large part, this trend is tied directly to the growing availability of target-date funds and managed account advice in retirement plans, and their resulting usage by participants."

Trend in asset allocation by participant age; average equity allocation participant weighted

The number of plans offering target-date funds—which determine portfolio allocations based on an expected retirement date and turn more conservative as a participant approaches retirement age—has steadily increased in recent decades. At the same time, a growing number of companies are providing target-date funds as the default for automatic enrollment programs.

The same is true of managed account advice platforms, whose availability has grown by nearly 30% in the past five years. As of 2022, the service was offered to 77% of Vanguard DC plan participants.

"Age-appropriate allocations aren’t the only advantage of this trend toward target-date funds and managed account advice," Clark said. "We’re also seeing record-low portfolio trading, which is remarkable given the market volatility we experienced last year."

During 2022, just 6% of DC plan participants initiated a trade within their accounts. Among participants who hold a single target-date fund, just 2% made an exchange.

Another trend is the reduction in extreme equity allocations among participants. The percentage of participants with no allocation to equities has fallen by about three-quarters, from 13% when the Pension Protection Act of 2006 was passed to 3% in 2022. (The Pension Protection Act introduced qualified default investment alternatives—typically a diversified investment option like a target-date fund, a managed account, or a balanced fund—to DC plans.)

At the other extreme, the percentage of participants investing exclusively in equities has declined from 19% to 4% over the same period. Investors who create their own asset allocations, meanwhile, are more likely to hold extreme equity portfolios; 20% of do-it-yourselfers did so in 2022.

How have these trends affected participant outcomes? When we look at five-year annualized returns, professionally managed allocations (notably, target-date funds and managed account advisory services) experienced less dispersion in outcomes. In other words, participants who managed their own allocations were more likely to see greater variability in returns.

The increased availability of target-date funds and managed account advice programs highlights how plan sponsors have prioritized helping participants create holistic financial well-being. "When you think about retirement readiness, it really comes down to two things: saving enough and investing appropriately," Clark said. "Plan design is pivotal. Our plan sponsors and consultants have continued to raise the bar and provide additional retirement security for our participants."

• How plan design tweaks can boost saving rates (article, issued July 2023)
• Vanguard reports record 401(k) participation (press release, issued June 2023)
• How America Saves 2023 (115-page PDF, issued June 2023)
• SECURE 2.0 is a step forward for retirement planning (article, issued January 2023)