1. Voluntary Pension Plans in the United States
Dennis P. Duffy
Principal
The Vanguard Group
May 2005

2. Agenda
Beneath the averages
Myths & facts
Savings adequacy

3. Sources of retirement income for U.S. workers
Universal “pay-as-you-go” public system.
Payroll-tax funded.
Payout: Indexed annuity.
SOCIAL
SECURITY
Voluntary, 50% of workers covered.
DB and DC, fully funded.
Payouts: Annuity or lump sum.
EMPLOYER PLANS
Tax-advantaged Individual Retirement Accounts, annuities, self-employed plans.
Taxable bank savings, brokerage, mutual funds, insurance products.
PRIVATE SAVINGS

4. What is a 401(k) plan? Employer-sponsored retirement savings plan
Worker pre-tax contributions
Employer contributions and/or matching contributions
Tax-deferred growth
Self-directed investment decisions
Diverse investment selection

5. Retirement plan coverage—1975 to 2003
Private sector workforce age 16 and over
No Coverage DC
DB/DC DB
Source: DOL through 1998; Vanguard estimates thereafter.

6. Plan participants—1985 to 2005 DC (+3%) 401K* (+9%) DB (-1%)
Active participants (millions)
DC (+3%)
401K* (+9%)
DB (-1%)
* 401K is subset of defined contribution figure.
Source: DOL through 1998; Vanguard estimates thereafter.

7. Are U.S. workers saving for retirement?
Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2005 Retirement Confidence Survey

8. Vanguard defined contribution plans
1,500 plan sponsors
1,900 plans
2.5 million plan participants
$430 billion

9. Participation rates
Source: The Vanguard Group, 2005.

10. Participation rates—beneath the averages
Of those under age 25, only 26% join.
Of those earning less than $30,000, only 41% join.
Of those with less than two years on the job, only 43% join. “Stayers are savers.”
Bottom line: Across all plans, one-third of eligible participants fail to join.
Source: The Vanguard Group, 2005.

11. Saving rates
Source: The Vanguard Group, 2005.

12. Saving rates—beneath the averages
There is a group of strong savers:
25% of participants saved 10% or more.
10% of participants saved the maximum allowed.
Yet 23% of participants saved 4% or less.
Source: The Vanguard Group, 2005.

13. Equity holdings
Source: The Vanguard Group, 2005.

14. Equity holdings—beneath the averages
13% of participants are 100% fixed income.
20% of participants have all of their account in equities— right for some, but not for everyone.
17% of participants have 20%+ in company stock—some have complementary DB/DC plan, but not always.
Source: The Vanguard Group, 2005.

15. Account balances
Source: The Vanguard Group, 2005.

16. Account balances—beneath the averages
18% of participants had account balances greater than $100,000. Most were:
Older
Long-tenured
And/or higher income
36% of participants had account balances less than $10,000.
Source: The Vanguard Group, 2005.

17. Agenda
Beneath the averages
Myths & facts
Savings adequacy

18. Myth
“Participants want more choice.”

19. Fact Only some participants want more choice.
Investment options offered versus those used
Source: The Vanguard Group, 2005.

20. Myth
“Enron heightened investor awareness of the risks of company stock.”

21. Fact Enron has had no discernable effect on company stock exposure.
In plans offering company stock
2000
2001
2002
2003
2004
Plans
% with company stock over 20%
34%
35%
33%
Participants
% with no company stock
% with more than 20%
45%
43%
44%
Source: The Vanguard Group, 2005.

22. Myth
“Mutual fund investors have experienced negative
personal returns over the past few years.”

23. Fact As of December 31, 2004, personalized returns for both
DC and Individual Retirement Account investors were positive across one-, three-, and five-year periods.
Median personalized investment returns, December 2004
Source: The Vanguard Group, 2005.

24. Fact As of December 2004, five-year returns were positive or break-
even for more than 80% of Vanguard DC plan investors and
70% of Individual Retirement Account investors.
Distribution of 5-year personalized returns, 2000–2004
Source: The Vanguard Group, 2005.

25. Agenda
Beneath the averages
Myths & facts
Savings adequacy

26. The median participant today
Age 44
Income of $69,000
Saving 9% (6% worker contribution + 3% employer match)
Diversified equity-oriented portfolio
Today’s median balance
$24,000
Single life annuity*
$164 per month
*Current single-life annuity value if participant were 65 today.
Source: The Vanguard Group, 2005.

27. The median participant of the future
Replacement rates
74%
65%
Assumptions: 3% inflation; 4% real return after costs; volatility of 16.5% on asset returns;
single-life annuity for male participant at current market rates.
Source: The Vanguard Group, 2005.

28. The real challenge Within DC plans–half are under-saving:
Non-participants
Low savers (one-quarter of participants at 4% or less)
Within the retirement system as a whole, problems loom:
Higher health care costs
The demographic crisis facing Social Security and Medicare
Higher returns could help–but participants are already taking a significant equity risk.

29. Participant Behavior Participation rate Plan contributions
Traditional Strategies
Introducing a match
+10% to +25%
Increasing existing match
0% to +15%
Introducing plan education
+10% to +20%
Loan within 401(k) plan
0% to +5%
New Strategies
Autopilot
Personalized Communications*
+3% to +25%
+4% to +15%
Note: Change in participation is measured in absolute percentage terms and plan contributions in dollar terms.
*Changes resulting from personalized communications are measured based on response rates for individuals receiving the communications.
Source: Vanguard estimates based on Andrews, 1992, Papke, 1995, Papke and Poterba, 1995,
Clark and Schieber, 1998, Bernheim, 1998, GAO, 1997, Munnell, Sunden and Taylor, 2000,
Huberman, Iyengar and Wei, 2002, and Choi et. al., 2004.

30. Vanguard’s innovative One Step® program
Automatic enrollment
Automatic savings rate increases
Automatic investment in balanced fund
Managed account advice programs
Managed retirement programs
Autopilot 401(k): Default designs leading to optimized solutions for reluctant savers while preserving choices for planners.

31. The bottom line
The top-line statistics on DC savings look fine. Our challenge is to look beneath the averages.
Top-line savings for the typical participant looks fine. If you’ve saved in the past, and continue to save in the future, you should be okay.
Yet, the real challenge remains among the non- and low-savers

32. Our collective challenge
“Twenty years from now, how many workers will complain that they have saved too much?”

33. Regulatory disclaimer
The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors’ shares, when sold, may be worth more or less than their original cost. For performance data current to the most recent month-end, which may be higher or lower than that cited, visit our website at
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© 2005 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.