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Rekenthaler Report

What Vanguard’s New Report Does Not Say About 401(k) Plans

The good news speaks quietly.

Billie Jean 2, Bobby 0

Vanguard has released a short paper, “Women versus men in DC plans.” The company sifted through the investment data of its 401(k) participants, looking for spots where the numbers might differ by gender. (Technically, the study examines other defined-contribution plan types in addition to 401(k)s, but for reasons of simplicity I will use the term 401(k) generically.)

The biggest difference was with participation: Women were 14% likelier to enroll voluntarily in 401(k) plans than men. Since men earned higher average salaries, and participation rates rise along with income, the difference was even larger when adjusted for income. For example, among those employees making between $50,000 and $75,000 per year, 81% of women voluntarily joined the 401(k) plan, but only 62% of men did so.

Apparently, women are more responsible than men. Color my wife surprised.

The other major difference lay in activity, as men traded 50% more often than women did. (Apparently, women are more patient than men. Color my wife surprised again.) If overall trading rates were high, and 401(k)s were taxable accounts rather than tax-sheltered plans, that increased activity by men would have been a big mistake. But as trades are free within 401(k) plans, and activity is relatively low, men did not suffer for their restlessness.

On a smaller scale, women had slightly higher contribution rates, were modestly more likely to hold target-date funds, and held somewhat less in company stock. Those are each sensible things, but the difference between the genders was too slight to have any meaningful effect on investment performance.

As it turned out, men outgained women, picking up 10.1% over the trailing five years as opposed to women’s 9.7%. Vanguard had no credible explanation for the 40-basis-point difference, suggesting that it primarily owed to men having more in equities, particularly in actively managed funds. As male participants had 74% in stocks and women were at 73%, asset allocation was not much of an explanation. As for Vanguard citing superior returns from active management…words fail me. Irony, thy name is Vanguard.  

Without further evidence, that performance gap is likely just noise. The coin landed on heads for men’s returns over the past five years, and it might just as well flip to heads for women over the next half decade. (Or it might not.) Thus, return expectations for the genders are similar, but as women participate more heavily, they are the superior users of 401(k) plans. That said, they end up with smaller balances because their salaries are lower.

All this is fine. The study confirmed some prior beliefs, and learned a couple of new things along the way. But I found the story that Vanguard chose not to tell to be more compelling. Three of the article's ancillary figures were striking.

Automatic Enrollment: 89%

The voluntary enrollment totals for Vanguard’s 401(k) plans were 66% for women and 58% for men (the eight-percentage-point difference between the genders divided by the men’s figure of 58% yields the “14% likelier” statistic quoted in this column’s second paragraph). In plans with automatic-enrollment programs, however, each group was at 89%.

Thus, while it’s better for 401(k) planning to be a responsible woman than an irresponsible man, it’s far better yet to be a zombie, if the zombie’s company has an automatic-enrollment feature. Painlessly, such features push participation rates to levels that were unimagined 20 years ago, when hours upon hours of enrollment meetings and lunchtime spiels struggled to get employee participation rates above 75%. In addition, they erase the gender gap caused by male fecklessness.  

Unfortunately, automatic-enrollment features have not yet become standard, as evidenced by Vanguard’s overall participation rates of 73% women, 66% men. Such figures, which are similar to those of the 1990s, justify the claim by industry critics that 401(k)s are failing the American people. The trend is favorable, though, as new plans embrace automatic enrollment. Participation rates are not yet where they must be--but they will get there.

Equity: 73.5%

As previously mentioned, men had 74% average equity stakes, and women were at 73%. While it’s possible that these reasonable averages were created by unreasonable individual allocations, with some investors who held no stocks canceling out others who held only stocks, that seems unlikely given than about half of Vanguard’s 401(k) participants own target-date funds. The median experience, it seems, is something that looks like a moderately aggressive balanced fund.

That allocation represents a considerable victory, both from the perspective of the American 401(k) proponents and from observers in other countries. The biggest early concern about 401(k) allocations, as the plans spread during the 1980s and 1990s, was that employees would overreact to market movements by shunning equities. That has indeed occurred in several overseas systems (most notably Japan). In those countries, U.S. 401(k) asset allocations are viewed as being notable successes.

They certainly have helped with recent performance. The average 401(k) return of roughly 10% annually, over the past five years, would not have been remotely possible without that large equity weighting, not with bond and cash yields hovering near zero. Put another way, a Vanguard investor who had $50,000 in a 401(k) plan five years ago, who achieved average performance, and who did not contribute a single new dime, would have about $80,000 today--and something near $100,000 if contributions were made. Wow.

(Yes, I realize that the stock rally has helped to create that high current figure, by pushing up the allocations of investors who are probably not rebalancing, but that stock position was pretty high even five years ago. It’s not as if 401(k) investors have been loading up on equities along the way; their investment patterns are very steady.)

Company Stock: 4%

Admittedly, this figure is lumpy. The average company-stock weighting of 5% for men and 3% for women is like a cup of boiling water dropped into a snowbank; the bank does grow warmer, overall, but most of the snow remains at the same temperature. Similarly, most 401(k) investors never own a penny of company stock, but periodically one will show up with a very large position. That leads to a small but perceptible overall average.

Which is not a perfect thing; zero would be the better allocation. (Writes the author who invests half his assets in MORN…I am the barber with the terrible haircut. But, I hasten to add, none of that is in Morningstar’s 401(k), which is company-stock free.) As with participation rates, though, the direction is good. Fifteen years ago, the figure was considerably higher. Most companies now attempt to run 401(k) plans solely for the benefit of the participants, rather than mostly for the participants with a dash of corporate self-interest.

What Remains

The report’s figures are not unrelievedly positive.

The study shows that both participation rates and contribution percentages grow sharply with income--the rich becoming richer. The numbers are more equitable than ever before, due in large part to the leveling effect of automatic-enrollment programs, but there’s no doubt that 401(k) plans serve the upper middle-class better than they do minimum-wage workers.

In addition, the average contribution percentage is lower for plans with automatic enrollment than for those that have only voluntary enrollment. That reveals a drawback with automatic-enrollment features as they were originally conceived--the same inertia that keeps participants in the plans after they enrolls prevents them from raising their contribution rates over time. This problem is being addressed by automatic-savings triggers that bump up the contribution rates into automatic-enrollment plans, unless the participant opts out. It will take some time, however, for those triggers to become commonplace. 

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.