Saving Smarter

Mike Zaccardi

VANGUARD GROUP released its latest How America Saves report last month. The survey details the behavior of participants in Vanguard-managed 401(k) and similar retirement plans.

Wall Street likes to depict everyday investors as fools. But the Vanguard report paints a very different picture: Employees are getting smarter. They’re saving more, trading less and aren’t so inclined to take big positions in their employer’s stock.

As I flipped through the numbers and charts with a cup of coffee on a recent Saturday morning, it struck me that today’s savers are doing many things right, while employers are often adopting policies that make matters easier for employees. Here are five ways to be smarter with your retirement savings, along with insights from the Vanguard study.

1. Snatch the match. Most 401(k) plans offer an employer match. In a common arrangement, employers will kick in 50 cents for every $1 an employee contributes, with the maximum employer match equaling 3% of the employee’s pay. The Vanguard survey found that, among the plans it handles, there were more than 180 distinct matching formulas.

The good news: A whopping 86% of plans feature a company match. (Another 10% of plans offer an employer contribution, even if employees don’t contribute.) The average value of the promised match was 4.5% of a worker’s pay. The caveat is there might be a waiting period, known as vesting, before you can keep the match.

Among plans with an employer match, 48% offered immediate vesting, while more than a quarter used a five- or six-year gradual vesting schedule. Check your benefits booklet or ask human resources if your employer has a match and what the vesting schedule is.

If you’re a job-hopper at an employer with a six-year vesting period, it might not seem worth contributing to the 401(k). But remember, you’ll still get the immediate tax savings for traditional 401(k) contributions and the tax-free growth offered by a Roth 401(k). For most employees, the smart play is to contribute at least enough to get the full employer match.

2. Fund a target-date fund. These are one of the financial industry’s greatest recent innovations. The funds allow investors to “set it and forget it” by offering an asset allocation geared to an individual’s life stage. The funds automatically turn more conservative as the target retirement date approaches. Moreover, a target-date fund (TDF) rebalances itself. No grunt work is needed. According to the study, 95% of Vanguard’s plans offered TDFs, up from 82% in 2011. Among the participants covered by the survey, 54% were invested in a single TDF.

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3. Avoid trading. The Vanguard survey found that increased adoption of TDFs helped investors avoid trading. Even during the 2020 market crash, just 10% of individuals exchanged funds within their 401(k). In aggregate, just 3% of money moved from stocks to fixed-income investments last year. Moving in and out at the wrong time is called “decision risk”—the risk that an investor has a great plan in place but mucks it up by selling out at the wrong time. Few traders, if any, can successfully time the market, so it’s best to settle on an asset allocation that fits your ability and willingness to accept risk—and then stay put.

4. Accept the nudge. Vanguard’s survey found that 54% of plans auto-enroll employees. That’s more than tripled since 2006. Auto-enrollment helps nudge people to participate in a 401(k), though individuals can always opt-out. Since humans are subject to inertia bias, auto-enrollment plays on our tendency to just stay the course.

Among plans with auto-enrollment, most also offer automatic annual contribution increases. A behavioral trick you can play on yourself is to auto-increase your 401(k) contributions each January. Auto-increase means you raise your contribution rate by perhaps 1% each year to coincide with a bump up in salary. Chances are you’ll barely notice the difference in your take-home pay and you’ll build a bigger nest egg in the process.

5. Consider a Roth. These accounts allow investors to pay income tax on their 401(k) contributions now and avoid tax later. A traditional 401(k) works the opposite way: You get a current-year tax break, but then you’re taxed upon withdrawal. Anyone who expects their tax rate to be higher in retirement should consider contributing to a Roth 401(k).

Keep in mind that employer contributions are always pretax—meaning you’ll eventually have to pay tax on those dollars—so adding your own Roth contributions can diversify your tax risk. On the other hand, if you’re in your peak earning years, you might want to favor pretax contributions, so you lower today’s taxable income.

The survey found that 74% of Vanguard plans offered a Roth feature and 14% of participants elected that option. This might seem low. But consider that all plan sponsors with automatic enrollment default to traditional pretax contributions for employees. Vanguard expects more participation in Roth 401(k)s in the future.

Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He’s a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at and check out his earlier articles.

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R Quinn
R Quinn
1 year ago

Good summary of the current state of things Mike. When I managed 401k plans we didn’t have Roth, but employees could elect to make after tax contributions which were counted toward RMDs, but contributions were not taxable. One other factor in all this is whether or not there is value in making pre-tax contributions IF doing so allows the worker to save more because there is a positive impact on take home pay. Especially significance if there will be no or little change in their tax rates in retirement.

1 year ago
Reply to  R Quinn

One of the things I love about Roths is the potential for a lot of workers to receive their Social Security tax-free. Tax a simple example: If you manage to save $1 million in a traditional IRA or 401k, the RMD on that amount would be about $40k. Couple this with, say, $40k in Social Security, and you have a resulting Federal tax bill of around $4,000, give or take, for a typical married couple filing jointly. Which isn’t too bad, in and of itself. But if that $1 million were in a Roth, your resulting federal tax bill, even when combined with $40k (or more!) of Social Security, would be $0, which is even better. In addition, your marginal tax rate with the traditional account is right at 22% currently, for married filing jointly, which is at or above the rate that many workers paid while working (to the shock and dismay of many us, who didn’t have an understanding of this until very close to retirement). Using the Roth is a double-favor to yourself: low- to zero- tax on Social Security, + zero tax on Roth account withdrawals.

So, most workers would be doing themselves a big favor, and using the Roth when possible. And, while it is possible to get there with later Roth conversions, those can involve a lot of careful math, timing, and stress that most people won’t want to fool with. It’s much easier to just start with the Roth to begin with, and forget about the so-called “tax savings” of a traditional account, as for many of us it’s mostly an illusion anyways.

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