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.
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