The 401(k) is an American institution, a popular way for savers to prepare for retirement by making regular contributions from every paycheck. Vanguard keeps the records for more than 4 million different accounts, giving it a bird's-eye view into what people save for retirement and how they invest in the future.
Below, I'll share five of the most interesting stats gleaned from the data on Vanguard's 401(k) plans and participants.
1. The average person only holds a few funds
Mutual funds and ETFs are responsible for the vast majority of assets held in 401(k) accounts, but data from Vanguard suggests that savers tend to use only a handful of funds to hold their wealth. On average, participants were offered 17.9 fund options in their 401(k), but the average account invested in just 2.7 of them.
Holding fewer funds is simply practical. Index funds enable investors to diversify with just one or two choices. The Vanguard Total Stock Market Index Fund holds every single investable stock listed on American markets. Many low-cost bond index funds offer similar total bond market exposure at a low price. Because so many funds are inherently diversified, owning more funds makes an account more complex, but not necessarily better.
Even Warren Buffett, the world's best investor, agrees a simple investment strategy is best. He laid out strict instructions to pass on his wealth to his wife by investing in a simple, two-fund portfolio.
2. Roughly half of all contributions are invested in one type of fund
When money flows to Vanguard 401(k)s, nearly half (49%) is invested in target-date funds. These funds are designed to make investing easy, as they automatically shift in composition as the investor nears their ideal retirement date. As you age, riskier assets like stocks are swapped for safer assets like bonds, consistent with traditional retirement-planning advice.
It's safe to say that target-date funds are winning by default. Roughly 46% of 401(k) plans at Vanguard invested in just one target-date fund in 2016, primarily because a majority of plans pick a target-date fund when the saver doesn't choose a fund on their own. These default funds are known as "qualified default investment alternatives," or QDIAs.
Default fund choices are better than holding your money in cash, but they're not always the best choice. Having helped friends and family navigate their 401(k) plans, I've seen many awesome target-date funds that are diversified and inexpensive. Some can be fee traps, however, charging 1% or more per year when the same portfolio can be constructed with other funds in the plan at a fraction of the cost. If you haven't touched your 401(k) in a while, or at all, consider logging in to your account online to see if there are better options than what you're using right now.
3. Savers rarely buy their company's stock
One of the most basic rules of personal finance is to diversify your investment portfolio from your income. If your employer hits a rough patch, you don't want to be in a situation where you lose your income and your retirement nest egg.
It's smart, reasonable advice, and most people heed it. I was surprised to learn that only 9% of Vanguard plans offered company stock, and less than 6% of participants held more than 20% of their account in company stock. That's shockingly low, given that some employers match contributions with stock, often requiring that shares are held for a certain length of time before they can be sold.
To be fair, there are some circumstances where it can make sense to invest in your company's stock, particularly if you can buy it at a discount to the market price. Discounts are usually capped to about 15% off the market price, but that discount adds up fast. Assuming the stock goes neither up nor down, buying at a 15% discount is like getting an instant 17.6% return on your investment.
4. Most people get started because it's automatic
Countless studies have shown that automatic 401(k) enrollment increases savings rates and worker outcomes. People who won't put in the effort to start contributing to a 401(k) plan are the same people who won't go through the effort to turn off automatic contributions.
When it comes to investing, ignorance can be bliss. According to Vanguard, 64% of all new participants in its 401(k) plans in 2016 were automatically enrolled. A fair percentage may not even know they have a 401(k) plan at all, or that their contributions are slated to increase over time.
Automatic enrollment is becoming much more common, with 45% of plans at Vanguard having this feature in 2016. That's a big improvement from 2012, when only 32% of plans automatically enrolled their employees.
5. The median saver puts away 10% of his or her income
In plans Vanguard oversees, the median person socks away 10% of his or her gross income. Employer matches help bring up the median savings rate, multiplying the employee's contribution from his or her paycheck.
Many companies offer high match rates (50% to 100%) on the first few percentage points of an employee's salary. Thus, an employee who contributes just 4% of pay may receive another 4% match on top, resulting in an 8% savings rate. Making a contribution to a matched retirement plan is like giving yourself an immediate pay raise. It's a mistake not to take full advantage of any matching program.
All in all, Vanguard's findings are encouraging, if only because they provide a bright spot in a topic that is frequently the subject of grim headlines. For all the hoopla about a future retirement crisis, it's good to see that Vanguard clients save a reasonable percentage of their income and keep it simple by investing in a few diverse funds. Sure, some people may not even know they're saving for retirement thanks to automatic enrollment, but if the destination is the same, does it really matter how you get there?