Data & Research December 14, 2011

DC Plan Account Accumulation Remained Positive Through Recession

During the period of 2005-2010 the typical defined contribution (DC) plan participant earned an average annual return of 3.76%.  
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The same participant also earned a cumulative return of just over 20%. These are some of the findings in a study released by Vanguard titled, “Participants During the Financial Crisis: Total Returns 2005-2010.”

According to the report, the typical plan participant’s retirement wealth invested over the five-year period grew by one-fifth because of investment results, despite the 2008-2009 market decline.

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Over the 2005-2010 period, the typical Vanguard DC plan participant earned a 3.76% average annual total return, and a cumulative return of 20.27%. Ninety-five percent of participants earned a positive total return over the five years. Over the period of 2007-2010, total returns were breakeven.

The report also found five-year returns for single target-date investors ranged narrowly from 3.62% to 4.65% per year (for the 5th and 95th percentiles) with a mean of 3.93%. Participants who made choices on their own, their five-year returns varied widely, from -0.02% to 8.09% per year, with a mean of 3.76%. 

 Single target-date and managed account investors had equity exposure declines in a disciplined way over time, while among all other participants it was “hump shaped.” For participants approaching retirement, ages 55-64, retirement wealth invested over the period of 2005-2010 grew by 21% for the average participant, and by 24% among single target-date investors. Older single target-date investors not only realized higher returns, but also had higher Sharpe ratios.

According to Vanguard, the results from the report underscore the importance of evaluating DC plan performance and retirement wealth accumulation over longer time horizons. Despite the fact there was a historic market shock in 2008-2009, DC account wealth accumulation was positive over the five-year period because of investment results alone—before considering the effect of contributions. This is also true for single target-date investors, including those nearing retirement.

For plan fiduciaries, Vanguard’s results draw attention to the widely dispersed nature of participant outcomes. Strategies such as target-date funds, managed accounts and re-enrollment into a qualified default investment alternative (QDIA) can be considered as ways to mitigate extreme portfolio choices.

To view Vanguard’s report in its entirety, visit https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvResDuringCrisis

Products December 14, 2011

Diversified Redesigns Tool to Help Participants Stay "OnTrack"

Diversified has introduced the next generation of its personalized retirement planning tool for participants.  
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To improve clarity and usefulness, Diversified’s OnTrack report has been streamlined into a single sheet that can be produced as soon as an organization becomes a Diversified client. “Employers can request that reports be provided to their employees immediately, giving sponsors a powerful tool to help their participants realize their financial retirement goals. We recommend that OnTrack reports be produced annually to keep this all-important message in front of participants, but, at any time, participants can also go online and retrieve their retirement outlook,” explained Patricia Advaney, senior vice president, participant solutions at Diversified. 

The primary goal of the newly designed report is to provide each retirement plan participant with a series of personalized savings rates that will help guide them toward a well-funded retirement. The report uses weather imagery to illustrate a participant’s current retirement outlook—rainy, cloudy, partly sunny or sunny—and how saving more could change their outlook.  

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In addition to helping participants get an idea of how well they’re progressing toward their retirement income goals, the report can also help plan sponsors understand how well their participants are doing in aggregate. Scores are captured by Diversified’s proprietary business intelligence tool so that sponsors can, for instance, see and track what percentage of their participants has a sunny outlook. By taking before and after measures, a sponsor can see how effective a campaign has been, which participants have taken actions that have impacted their outlooks, and which segments of the population may still need help.   

Diversified’s participant website offers another way to assess retirement readiness (see “Diversified Changes Participant Report“). 

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