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

2. > 2 Agenda Beneath the averages Myths & facts Savings adequacy

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

4. > 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. > 5 Retirement plan coverage—1975 to 2003 Source: DOL through 1998; Vanguard estimates thereafter. DB DB/DC DC Private sector workforce age 16 and over No Coverage

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

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

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

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

10. > 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.” Source: The Vanguard Group, 2005. Bottom line: Across all plans, one-third of eligible participants fail to join.

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

12. > 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. > 13 Equity holdings Source: The Vanguard Group, 2005.

14. > 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. > 15 Account balances Source: The Vanguard Group, 2005.

16. > 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. > 17 Agenda Beneath the averages Myths & facts Savings adequacy

18. > 18 Myth “Participants want more choice.”

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

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

21. > 21 Fact Source: The Vanguard Group, 2005. In plans offering company stock 20002001200220032004 Plans % with company stock over 20%34%35%34%33%34% Participants % with no company stock33%35%34% % with more than 20%45%43%45%44% Enron has had no discernable effect on company stock exposure.

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

23. > 23 Fact Source: The Vanguard Group, 2005. 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

24. > 24 Fact Source: The Vanguard Group, 2005. 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

25. > 25 Agenda Beneath the averages Myths & facts Savings adequacy

26. > 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. > 27 The median participant of the future 65% 74% 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. Replacement rates Source: The Vanguard Group, 2005.

28. > 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. > 29 Participant Behavior Participation ratePlan contributions Traditional Strategies Introducing a match+10% to +25% Increasing existing match0% to +15% Introducing plan education+10% to +20% Loan within 401(k) plan0% to +5%+10% to +20% New Strategies Autopilot+10% to +25% Personalized Communications*+3% to +25%+4% to +15% 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. 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.

30. > 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. > 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. > 32 Our collective challenge “Twenty years from now, how many workers will complain that they have saved too much?”

33. > 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 www.vanguard.com. For more information about Vanguard funds, visit www.vanguard.com or call 800-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in these documents; read and consider them carefully before investing. The Vanguard Group, Vanguard, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. © 2005 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.