Investing for retirement can be complicated, but it doesn't have to be. Although individual goals and challenges may differ, the fundamentals of a sound retirement strategy — saving early, saving sufficiently and investing in a low-cost, diversified portfolio — are universal. The more employers can simplify the process of enrolling, saving and investing in a retirement plan, the better off their employees will be in the future.
The steady shift of 401(k) plans from paper-based, decision-intensive tasks to a more digital, intuitive system supports the call for a simpler way to invest.
Today, 64% of new employees are set up for success when their employer automatically enrolls them in a retirement plan with a recommended savings rate and prudent investment portfolio. When I think about my retirement plan enrollment experience many years ago and what new hires experience today, the change is remarkable. Retirement tasks that used to require all-day meetings and stacks of paperwork are now completed online before participants receive their first paycheck.
Each year, Vanguard publishes "How America Saves," a comprehensive look at how retirement plans are evolving and how participants are responding to change. The data clearly reveal the benefits of automatic enrollment. Participation rates are up to 90% among plans with automatic enrollment compared to 63% among plans using voluntary enrollment. Investment portfolios are more balanced as the use of target-date funds grows. Savings rates are also increasing. Nearly half the plans Vanguard works with use defaults of 4% or higher, and 70% of those using automated features increase contribution rates each year. Taken together, this type of smart plan design puts participants on a solid path to retirement readiness.
Defaults are powerful. Participants tend to stay with the savings rate they're assigned when they join the plan. The same holds true for automatic annual increases and investment selections. Plan sponsors recognize the importance of setting appropriate defaults to help participants reach their retirement goals.
Policymakers also are looking to use electronic defaults to expand retirement planning best practices. The Receiving Electronic Statements to Improve Retiree Earnings Act, a bipartisan bill introduced in the House of Representatives (H.R. 4610) and supported by Vanguard, would allow plan sponsors to make electronic delivery the default method for communicating with participants. Paper has served as the default communication method since the passage of the Employee Retirement Income Security Act of 1974, and the industry has come a long way in technological advances in 40-plus years. Through their legislation, Reps. Jared Polis, D-Colo.; Phil Roe, R-Tenn.; Ron Kind, D-Wis.; and Mike Kelly, R-Pa., with the support of 25 additional bipartisan co-sponsors, extend the benefits of these improvements to a far greater number of retirement savers while protecting a right to paper at no participant cost.
Given participant preferences — Vanguard had 97 million interactions with retirement plan participants last year; 93% of them were online — and the administrative and cost considerations for employers, this legislation represents a great step in modernizing and streamlining the preferred communication method for participants. According to research from the SPARK Institute, switching to an electronic delivery default could produce $200 million to $500 million in aggregate savings annually that can translate to lower expenses — and, thus, higher returns — for retirement plan investors. Plan sponsors will also have the ability to better direct participants to useful online education and tools we believe can lead to better retirement outcomes.
Americans already have become digital consumers, from booking a vacation or ordering a book to arranging a ride across town or tracking exercise. Similarly, today's retirement plans are adopting tailored messages and personal recommendations to encourage healthy saving habits. When participants deviate from their plan, we can nudge them back on track with an email or a mobile notification. If they're not meeting the match offered by their employer, we can customize their login screen to encourage a higher savings rate. Participants investing too much at the extremes — taking too much risk with a high allocation to equities or not enough risk with a high allocation to bonds — will receive information about more balanced solutions, like target-date funds.
With digital communications advancing at a rapid pace, is there still a role for more traditional elements of communication? Of course. Not all participants want to plan online or with an app, and those investors that prefer a phone transaction or paper statement will have those options available at no additional cost to them.
But, my advice to Congress and plan sponsors looking to enhance the simplicity and effectiveness of their plans is straightforward: Default to digital and use technology to get your participants closer to their retirement goals.
Martha King is managing director and head of Vanguard Institutional Investor Group, Malvern, Pa. This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.