John Ameriks, Ph.D., head of Vanguard Quantitative Equity Group and a longtime contributor to the effort, said that Vanguard’s partnerships with outside academic institutions, such as the VRI, are a great opportunity to share data and insights, help refine research techniques, enhance investor advocacy, and advance initiatives to address practical challenges that investors and advisors face. 

“Vanguard’s partnerships with academic institutions represent long-standing relationships,” Mr. Ameriks said. “By developing rigorous survey questions that can be quantitatively measured, we work together to identify and solve real-world problems facing investors.”  

Using detailed but anonymous wealth, health, and demographic data from more than 9,000 Vanguard clients, the VRI employs an innovative approach to understanding the decision-making and well-being of older Americans. This includes the following key retirement-related considerations:

• Spending decisions when someone is well as when someone needs assistance
• The decision to retire or work longer
• Long-term care in private or publicly funded facilities
• Leaving bequests versus spending in various health states

But what makes the initiative unique is the distinctive measurement techniques. These consist of strategic survey questions, modeling, and estimation that can precisely quantify the considerations that affect decision-making and well-being leading up to and during retirement.

“We draw insights from Vanguard clients who respond to surveys where we present detailed scenarios about real-life financial decisions. We use this information to make quantitative estimates that can guide saving and investment policy,” said Matthew Shapiro, the Lawrence R. Klein Collegiate Professor of Economics and director of the Survey Research Center at the University of Michigan. Professor Shapiro has partnered with Mr. Ameriks and Professor Andrew Caplin of New York University since VRI’s beginnings in 2011.

Mr. Ameriks said that one of the challenges that the strategic survey questions address is the limitations of observations. “For a long time, rule number one for economists was to watch what people did and pay less attention to what they said,” he noted. “The problem is a set of circumstances that you can actually observe is often very limited. So, unless you are also asking probing questions about what people are thinking, you’re probably not going to get a good sense of their intentions.”

The strategic survey questions that the VRI designs are much more in-depth than traditional survey questions. Professor Shapiro said: “Our objective is to go deep into investors’ thinking about how they approach real-world problems. We present hypothetical economic problems. While the questions are involved and challenging, they ask about trade-offs that households face as they make decisions over their lifetime.”

Through the VRI, Vanguard and its academic partners have collaborated on a number of projects that have helped explain patterns of behavior on important topics affecting real-world savings and investment decisions, including retirement income, asset allocation, and long-term care.

Mr. Ameriks noted that the group’s work on retirement income in particular has helped Vanguard develop effective solutions for clients and advisors.

“While annuities might be a solution for some participants, every investor’s situation is different in retirement,” he said. “The VRI’s work in this area has really helped Vanguard conclude that there is no one-size-fits-all solution to this challenge and develop a comprehensive lineup of products and services for investors drawing down assets in retirement, including systematic withdrawal strategies in addition to annuities.”

Vanguard’s relationship with our academic partners resulted in the publication of two research papers on cognitive decline. One was as part of the VRI and was also issued by the National Bureau of Economic Research. Our Investment Strategy Group (ISG) published the other paper.

Both papers focused on the impact of cognitive decline on the investment decisions of investors approaching or in retirement. The papers addressed trade-offs that investors must consider later in life, such as whom an investor would name to take control of the investor’s affairs in the event of incapacity, how effective that person would be in overseeing the investor’s finances, and when an investor should give up control of finances.

The two papers differ in their emphasis. The VRI paper has a more detailed and theoretical academic approach, while the Vanguard ISG paper is focused more on business and practical applications. 

Most Vanguard clients who were surveyed indicated that they had someone whom they could turn to and that this person was usually one of their children. Survey participants also tended to think that the agent they selected would do a good job of understanding and anticipating their needs.

But Professor Shapiro said the most interesting finding was that survey participants generally were reluctant to turn over control to their designated agent at the outset of cognitive impairment even if they made financial mistakes because of this decision. More than 8 in 10 thought the ideal timing would be after the onset of decline but prior to complete incapacity.

However, it often isn’t easy to transfer control at the right time. Sometimes cognitive decline is hard to detect, particularly for those who are experiencing it. As a result, although investors with designated agents may have a certain level of incapacity that will trigger the transfer of control, they also realize that the actual timing of transfer may be very different from the timing they want. This can be most concerning when the transfer happens too late and leads to irreversible damage to their finances.

To get a better sense of how concerned investors are that the transfer would take place at the wrong time, the researchers asked Vanguard clients to express the expected damage to their overall financial situation in dollar values if the transfer happened at the wrong time. While results varied, respondents on average thought having the transfer take place at the wrong time was equivalent to losing 14% of their total wealth, or more than $300,000.

“This significant value investors place on maintaining control of their finances is something that advisors and other investment professionals should consider in crafting solutions for their clients approaching or in retirement,” Professor Shapiro said.  

After the surveys were completed, Vanguard and our academic partners focused on different aspects of the survey findings in assembling their research papers on cognitive decline. 

“As researchers, we all have shared, as well as distinct, interests, and our collaboration leads to different kinds of research papers that industry, academics, investors, and many others can assess and leverage,” said Anna Madamba, a senior investment strategist in ISG who wrote the Vanguard ISG paper on cognitive decline. 

Ms. Madamba added that the Vanguard paper focuses more on application and the impact on advice strategies for our clients. The VRI paper brings together expertise in the field, in theory and methodology, to come up with insights that would benefit investors.

What’s clear from the initiative on cognitive decline as well as other collaborative efforts between Vanguard and our academic partners is that these efforts have helped all participants.

“Our collaboration with Vanguard has been important to us as academics particularly in terms of producing concrete results that lead to improved decision-making, products, services, and policies that help all investors,” Professor Shapiro said. “I know I speak for everyone involved in expressing our gratitude to Vanguard clients for committing so much time to participate in our comprehensive surveys.”