Episode 84, Jeff Clark, author of "How America Saves 2025," Vanguard's annual report on workplace 401(k) plans, host Rick Ferri

0:09Welcome, everyone, to the 84th edition of Bogleheads on Investing. Today, our special guest is Jeff Clark. Jeff is a 27-year veteran of Vanguard's Workplace Solutions, which runs over 1 ,400 retirement plans for almost 5 million participants. He is also the author of Vanguard's new study, How America Saves, 2025.

0:42Hi everyone, my name is Rick Ferry and I am the host of Bogle Heads on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a non-profit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net where you will find a treasure trove of information, including transcripts of these podcasts. Before we begin, I have one special announcement. Tickets for the 2025 Bogleheads Conference are now on sale at boglecenter.net. This year's conference will begin at noontime on Friday, October 17th, and run through noontime on Sunday, October 19th.

1:29It will be at the Hyatt Regency San Antonio Riverwalk Hotel, a beautiful location directly across from the Alamo. You'll find a list of speakers at the BogleCenter.net website, and a full agenda will be up soon. I hope to see many of you there. In this episode, my guest is Jeff Clark. He's a 27-year veteran of Vanguard's Workplace Solutions. This is the division within Vanguard that consults to about 1 ,400 employers and administers 401k accounts for almost 5 million employees. Each year, Vanguard publishes a detailed report on the 401k marketplace and digs into their own client accounts to answer a lot of questions about what works and what doesn't.

2:22Jeff is the author of this report and brings to us a lot of great insight. So with no further ado, let me introduce Jeff Clark. Welcome to Boogleheads on Investing, Jeff. Thanks for having me, Rick. It's a real pleasure to have you on because this study, How America Saves, the 2025 edition, is really insightful into not just how retirement plans are evolving, but the study also shows how the evolution has improved the plans for the employees and the employers. Greater participation rates, better investment options, better returns. We're going to get into all of that today. But before we do, I'd like you to tell me a little bit about yourself, your career, and how you ended up as the author of How America Saves.

3:17Absolutely, yes. So I am a 27-year veteran at Vanguard. I have been on our Workplace Solutions division my entire career. For many of the last, I would say close to 20 years, I've been involved with How America Saves. For many years, served as one of the lead data analysts, and more recently, over the last few years, have taken over author of How America Saves. So my role is really pulling out all of the most pertinent information of what we see within 401k plans, getting everything into How America Saves. We also have various other research and thought leadership initiatives. We have looked at a lot of this through different generations, through gender, to really kind of highlight where some of the successes have been with retirement plans, as well as, you know, where some of the opportunities lie ahead.

4:05Vanguard has a deep understanding of this. You've got almost 5 million participants in Vanguard plans. Yes. So when we look at how America saves, I mean, I'd say one of the things that really kind of makes this a little bit more, I would say, distinguished in the industry is that we are looking at the actual behavior of participants. This is all through traditional data analysis, looking at the behaviors of 5 million participants. Those are 5 million participants across 1 ,400 defined contribution plans. And then also looking at the attributable plan designs of those as well. Yeah. looking at the way that plan designs really have started to impact the way that workers are saving for retirement.

4:53And I would say, you know, at the end of the day, this How America Saves publication, it really embodies Vanguard's mission. I mean, this report, at the end of the day, is really providing insights to the retirement industry, whether that's, you know, plan sponsors and consultants, you know, even the end participants, to help continue that progress that's been made. In the end, drive better retirement outcomes and give all investors, all participants, the best chance for investment success. I will make a comment about the number of plans, 1 ,400. Vanguard used to administer many more. My own company, I had a solo 401k with Vanguard, but a couple of years ago was pushed out to another firm, to put it nicely.

5:40Did the elimination of solo 401ks at Vanguard change this study? So in addition to the 1 ,400 plans that we have here at Vanguard, we also work with Ascensus. They provide record keeping for a lot of the small business retirement plans. So we have over 20 ,000 small business plans that are not included in the How America Saves publication, but we are in the process of looking at that data separately. And that will be a report out later here in 2025 that's really going to zero in on how are those smaller business 401k plans performing, especially as you compare them to larger plans. Interesting.

6:20I'm looking forward to reading that. Let's go ahead and get into this study. I'm going to go through the report from basically the beginning to the end. I am going to leave out the loan portion of it at the end. But anybody who wants to download this, it's free. Just search for How America Saves 2025. The PDF will come up, and all this information is available to you. So we're going to go through the report. And the first thing that we come across is vesting, because not all 401ks, when money goes in, immediately vests. In fact, in the plans that you looked at, only 50 % have immediate vesting.

6:55And is that the employer's side only, not the employee's side? Correct. So with vesting, these would be looking at both the employer matching contributions as well as some plans may offer a non-matching. So that could be a profit sharing or a non-elective contribution that essentially, you know, everyone would get. It wouldn't be predicated on deferring from your own paycheck. And, you know, I would say overall about half of plans essentially have immediate vesting for their employer matching contributions. And I would say overall we've seen that to be fairly consistent over the last several years.

7:29But one area that I think has been increasing might be eligibility. We are seeing more plans start to allow their workers to start contributing on day one. So 76 % of retirement plans now allow for immediate eligibility. There are some 401k plans that the employer doesn't put anything in. They don't do any matching. They don't do any other, let's say, profit sharing contribution or just percentage of salary contribution. But of the ones that do have an employer match where the employee puts in money and then the employer matches it, it seems that the range for that is between 3 % and 5 % generally.

8:08Most of the plans are doing matching between 3 % and 5%. 50 % of plans essentially offer just an employer match, but another 36 % of plans we have found also offer a match as well as a non-matching contribution. contribution. So then in addition, about 10 % of plants just offer that non-match and only about 4 % of plants within our population do not offer any type of employer contribution. But you are correct. You know, the most common overall matching values are in that 3 to 5 % range. The average matching value right now is 4.6%. So that's essentially just taking all the different match formulas.

8:50You know, if you have a 50 on 6, that's a 3 % value. 100 on 6, that's a 6%. We take an average of those, you know, fully maximized employer match values. It's now 4.6, and that's up from about 4.2 10 years ago. So we're also seeing some improvements in plan design with sponsors starting to increase their employer match, you know, especially as a way to, you know, retain and attract employees. Of all of the plan participants that do participate in the plan and not all of them participate as an employee, and we'll get into that in a minute, but of the ones that do, how many just do enough to get the match and how many of them do more than that?

9:32Yes, and this actually starts to get impacted by auto-enrollment defaults. defaults. Now, overall, I would say that about 70 % of participating employees contribute enough to get the match. One area that we are starting to see, though, is you have an auto-enrollment, and let's say you're defaulting in at 3%, but your match is 50 on 6, you could end up with a lot of participants who are not maximizing the match, just because we know inertia sets in, they get defaulted in at 3 % and they might not be looking to get up to those higher employee contribution levels. But I would say broadly around 70 % of participants essentially do at least maximize the match, if not save more.

10:16How many plans are you seeing that are doing that? In other words, they're doing two levels of match. They're doing the first 3 % of salary at 100 % and then and the next 3 % at 50%. Is that a trend? So the most common match is still 50 on six. Now that has started to not be as prominent as it once was, but it is still the most common match formula. The second most is the type of formula that you're describing right now. So that would be 100 on the first three, 50 on the next two. So you'd have to contribute five, and in effect, you'd get a 4 % employer match. But then the next three most common after that are 100 on six, 100 on five, and 100 on four.

10:59So I would say generally, I mean, there are other, I would say, you know, multi-tier matching formulas out there. I would say probably about 20 to 25 % of plans would have some type of a multi-tier where the other ones are going to have just a straight X percent up to X percent of pay. Yeah, thanks. The reason I'm asking all these questions is because we have a lot of people who listen to this program who are in a 401k or even are trustees of a 401k, and they are looking for information of, you know, what's new? You know, what can I do better? You know, how can I improve my plan or how can I suggest my employer improve the plans?

11:42That's why I'm asking you a lot of these questions about the trends. Yeah. The number one trend from a plan design perspective that we are most encouraged by is auto enrollment. Every year we're seeing more and more plans adopt auto enrollment. And as of last year, 61 % of all plans have an auto enrollment design. And then you look at those plans that are a little larger, that have at least 1 ,000 participants within them, that number gets close to 80%. And I would say what's most encouraging is that every year we're seeing those numbers increase from the year prior. So auto enrollment certainly is not a new feature for 401k plans, but over the last 20 years, we've seen continual growth.

12:21And certainly with Secure 2.0 mandating that new plans in the future are going to have to have auto enrollment, you know, we anticipate these numbers to continue to rise. Which gives us that second part of the report, which is participation rates, which begins with the discussion about auto enrollment. And as you said, overall, 61 % of the plans have adopted auto enrollment. But in digging into the data a little bit, it seems as though the companies that are doing auto enrollment are the ones who are larger. Because as I look at the data, it seems like the companies that have less than 500 employees, because you have a spectrum here, less than 500, 500 to 999, 1 ,000 to 499, and then over 5 ,000.

13:12It's the companies that are larger, which tend to offer auto enrollment versus the ones that are smaller, a lot less do. In fact, it's about half. So 80 % of large companies have auto enrollment, but only about 40 % of small companies do. Why do you suppose that is? I think as you think about larger companies, They are hiring more employees. I think auto enrollment really helps just to kind of, hey, you don't have to do anything. You can essentially, you'll be saving from day one. Smaller companies, there may be maybe a little bit more ability to do a little more handholding, sort of on that onboarding process to be able to walk through a retirement plan, explain how it works.

13:58They may not feel, well, the number of employees that we hire in a certain year, maybe we don't feel like we necessarily would need it. But, you know, I would say when you look at the data and you look at the participation rate differences of those plans with auto enrollment, it's quite stark. So 61 % of all the plans offer auto enrollment. And I'm going to ask a two-part question here. So what is the participation rate when the plan offers auto enrollment? And what is the participation rate for voluntary enrollment in plans that do not have auto enrollment? Yeah. So when you look at our plans that offer an auto enrollment design, 94 % of employees participate in that plan.

14:44Wow. When you look at our plans that have a voluntary enrollment where essentially employees would need to take the proactive step to sign up for their 401k plan, that number is around 66%. And so there's a very large difference there. And I think what's interesting is, hey, if we go back 20 years to, you know, right before the Pension Protection Act in 2006, sort of when, you know, auto enrollment came onto the scene, the overall participation rates at Vanguard were around 65, 66 percent. About one out of every three workers were not saving for retirement. So as you think about the improvements that we've made now, and now the average plan participation rate here at Vanguard is 85 percent.

15:25That is an all-time high. But if you look at the voluntary enrollment plans, their participation rates are still pretty much kind of right in line with where they used to be 20 years ago. Now, where auto enrollment really helps the most, it's with new hires. If we look at longer tenured workers in voluntary enrollment designs, their participation rates are usually pretty strong. In fact, they're almost pretty close to where those longer tenured participants in auto enrollment would be as well. But as we know, it's all about time in the markets and getting contributions in. That first year of employment can make a huge difference.

16:04You think about retirement readiness. So with auto enrollment, we know, hey, workers in that first year, over 9 out of 10 are going to be saving for retirement. It's really for those voluntary enrollment plans, you'll start to see participation rates start to increase around year 4, 5, 6. So auto enrollment just does an incredible job, especially with those less tenured employees. Well, that's really great news and badly needed with the demise of defined benefit plan and the rise of 401k plans as the primary source of saving in the workplace for retirement. Okay, the next area you have to explain to us.

16:43A default automatic increase and the default automatic increase rate. And then there's also an increase cap. First of all, explain what a default automatic increase is, and then what a default automatic increase rate is, and then what a cap is. Absolutely. So when a plan has an autoenrollment design, they initially will set a default automatic enrollment rate, which is essentially the rate that you'll go in at. Initially, when a lot of autoenrollment designs were created, 3 % was certainly the most common. And what we have seen is a shift towards higher default rates. So now over 60 % of plans now default in at a rate of at least 4 % or more.

17:26In fact, 30 % of plans default in at 6 % or more. And our research has shown that, you know, if you default someone in at a 3%, 4%, 5%, or 6 % default rate, even looking at it by income, you're going to have very similar opt-out rates. So it's, you know, a lot of plan sponsors are thinking about ways to set that default at least at that maximum match rate. So if you have a match that's 50 on 6, hey, let's default in at 6. and that way employees can start realizing that full employer match from day one. Now, the default automatic increase rate, about 70 % of plans that offer auto-enrollment also automatically enroll workers into an annual escalation feature.

18:06So typically that's a 1 % increase every year up to a set cap by a plan sponsor. And so this way, let's say you're going to get defaulted in at 6, and the next year you're automatically going to get bumped up to 7%. Now, certainly employees can override this. They can opt out of that. We'll see some employees go in and just say, hey, from day one, they want to just save 10%. They want to turn the auto increase off. We've seen that for when plans offer auto enrollment and the auto increase, their workers save about 20 % to 30 % more within the first three years of saving compared to just those plans that have an auto enrollment design.

18:43Now, the default auto increase cap is, let's say you're a plan sponsor and you have that annual escalation feature. You can have a default cap, which essentially would say, all right, we're going to default you up to, let's say, when you get to 10%, we're going to stop you. Or we're going to get 12 % or 15%. So there's going to be essentially a cap. Now, most plan sponsors would allow participants to set a higher cap if they would like or a lower cap. But usually plan sponsors will build in some type of a cap. And at the end of the day, you know, Vanguard would recommend workers save in total about 12 to 15 percent.

19:21A lot of sponsors are thinking about what's the quickest way to get participants to that 12 to 15 percent. And that would include the employer match. Absolutely. All right, let's get into the demographics. I mean, who is actually taking advantage of this? And here we have some interesting data. And you break it down by income, age, gender, job tenure, how many years they've been at each company. Let's talk about income first. Very clearly, people with higher incomes have higher participation rates. And the lowest income have actually declined in the last few years. So let's look at that. So yes, when we start to look at it by income, clearly those that are earning, I would say the highest amount have very strong participation rates.

20:15And they have remained, I would say, very strong throughout. Now you will start to see the last couple of years some of the lower income participation rates start to decrease. I would really say that's just more of a change in business for us with, you know, having a couple of maybe a couple of larger plans that had a lot of lower income workers that are no longer in the data right now. Oh, I see. So it could be just an issue with the data, not really the fact that, say, nationwide, people who have lower incomes are participating at a lower rate. No, I mean, especially as we look at the aggregate numbers, I mean, they're still very, very strong overall.

20:58And I would also say, especially within How America Saves, some of those lower income segments, at the end of the day, there's not a lot of employees in there. The median income for the employees and participants in our data samples in the$80 ,000 to$90 ,000 range. Okay, very good. Okay, the next thing is age, and here you would expect, well, I mean, again, auto enrollment is probably going to help this, but again, we have lower participation rates for those who are less than 25 years old, I mean, just coming into the workforce, which I would think should be higher because of auto enrollment. You could have plans that are of a voluntary enrollment that just have a lot more younger workers, and that's really kind of what leads to those overall lower numbers.

21:53I mean, if you look at it, when you break it down by voluntary and auto-enrollment, for those workers under 25, if their plan offers an auto-enrollment design, 90 % of those younger workers participate, compared to just 25 % in a voluntary enrollment design. That is a huge difference. Absolutely. Especially when you think about just the power of compounding and, you know, what those first few years in your early 20s, what those dollars could look like in retirement. That makes a huge difference. Huge difference. And that 25 % voluntary is significantly lower than, you know, pretty much any of the other age cohorts.

22:30Most of the other age cohorts are, you know, in the 60s and 70s percent, as you would expect overall. all. But yeah, but the auto enrollment does an incredible job, as I mentioned before, with lower tenured and younger participants. And so the next category is gender, men, women, or you have male, female. It's about the same. And it's been about the same every year that you looked at this. Men are not participating more than women. Women are not participating more than men. It seemed pretty equal. Overall, the numbers are very equal. But when you start to look at it by income, One of the things that we highlight in How America Saves is that at most income groups, women do have higher participation rates than men.

23:14Now, that's not a significant difference. But, for example, if you look at everyone that earns between$75 ,000 and$100 ,000, 91 % of women participate compared to 86 % of men. In fact, when you look at the highest pay, those earning over$150 ,000, 96 % of women participate compared to 94 % of men. And so what we see here really, though, is that unfortunately, these numbers get all averaged out just because of the income gap. There just happen to be more men that are in those higher income brackets. So when you start to segment it by income, while women are participating higher than men at most income segments, because there are more men in the higher income segments that just usually and typically have overall higher participation rates, the averages turn out to be about the same.

24:05The last category is tenure, job tenure, how many years you've been on the job. And here we see people who have been on the job for one year or less have a lower participation rate. And as they increase their tenure to two to three years, four to five years, it increases. And I'm going to guess maybe, I'm speculating here, maybe the participation rate at the one year or less level is lower because some of these plans do not have immediate vesting of the employer's side. Does that have any validity to it? I mean, the main cause really is auto enrollment. I mean, if you look at those workers that have less than two years of tenure in an auto-enrollment design, 90 % are participating.

25:02Those all workers with less than two years of tenure in a voluntary, only 40 % are participating. So there is a 50 percentage point gap. I mean, those in an auto-enrollment are more than twice as likely to be participating. And that's really kind of what's at the end of the day driving that overall tenure number to be a little lower. Do you see anything in the data that says that not doing immediate vesting of the employer match or the employer contribution is causing people to not or to decline auto enroll in the first year or so? We have not found any correlation between vesting schedules and participation.

25:43Okay, perfect. Figure 30 is startling. It shows the huge difference on an income level, on an age level, on a job tenure level, breaks it down between participants who will sign up under auto enroll versus participants who would voluntarily sign up. And it's startling, the difference. Yeah, we think about, you know, essentially modern plan design, the development of just more plans offering auto enrollment has been absolutely, you know, I would say the biggest driver in helping workers prepare for retirement. You know, even just in speaking with, you know, a lot of HR professionals, you know, a lot of them will say, you know, hey, you know, our employees, they greatly appreciated this because it might not have been something they were even, you know, maybe even thinking about.

26:42You know, they might be two or three years into their career and then all of a sudden, like, wow, like this has really kind of grown into, you know, a nice, you know, starting retirement savings account. And, you know, as we think about more plans offering it, plans are continuing to improve the design of their auto enrollment. They're also more likely to offer immediate eligibility. They're increasing employer contributions. All of these really are great steps to help workers prepare for retirement. Because at the end of the day, as you mentioned at the beginning, I mean, 401K plans really are the prominent vehicle that workers are using to save for retirement right now.

27:19And so the more that, you know, employees can make it easy and have a really strong design, the better off workers are going to be. You know, and it's also important to think about just the workforce in general today. I mean, you know, one of the advantages of defined contribution plans are they are portable. And, you know, with a lot of workers changing jobs more frequently, you know, the typical worker is probably going to have maybe nine or ten employers. They change jobs about every four years. Having auto-enrollment with immediate eligibility and strong defaults helps to maintain those strong savings habits through job changes, you know, versus, you know, unless your plan has a voluntary enrollment design, like as the data shows, over half of workers in their first two years never take the steps to sign up for that 401k plan.

28:08But having an auto-enrollment design that has that strong default at the employer match rate, you know, essentially can kind of help. And with that annual escalation feature, again, it's, you know, how quickly can you get workers saving that 12 to 15 percent? And the more employers that start to, you know, offer this, the better off overall retirement readiness will be for workers. So I'm going to pivot here for a second. What do you think about these TikTok people who are telling their listeners, 401k plans are a sham. Don't put your money in them. Put your money into this insurance product that I offer.

28:48I would say, I mean, if you think about 401k plans, the tax advantage standpoint of them, as well as just the ability to, for most plans, get those additional employer contributions. to be able to have a fun lineup that is well diversified. And there's nothing easier than contributing to a 401k plan. It comes right out of your paycheck. I mean, it is incredibly easy, and it is definitely standing the test of time. That's a very professional answer. Now I want you to really tell me what you think about these TikTok people.