Improvements in retirement-plan design have put more workers in a better position to meet their retirement goals, yet for Americans who lack access to a plan, the outlook remains challenging.
That was one of the key takeaways from Vanguard’s inaugural Retirement Outlook report, which evaluates retirement readiness for a nationally representative sample of American workers. In conjunction with the report, Vanguard introduced a new proprietary forecasting tool—the Vanguard Retirement Readiness Model (VRMM)—which incorporates inputs from Vanguard's capital markets model (VCMM) in combination with empirical data on household balance sheets, savings rates, and spending patterns to estimate retirement readiness for different age and income groups.
Among other things, the report documents estimated spending needs, the income that can be covered by Social Security, and the self-financing necessary to bridge the gap. 
Notably, for most income cohorts, Millennials and Generation X enjoy a brighter retirement outlook than Boomers. While these generations have faced more financial pressure than late Boomers from the rising costs of higher education and health care and the growth in student debt, they have also benefited from improvements in DC plan design, particularly since the passage of the Pension Protection Act (PPA) in 2006.
As most industry observers are likely aware, the PPA facilitated the use of plan features such as automatic enrollment, automatic escalation, and investment in qualified default investment alternatives. The combination of these enhancements has made it easier for retirement savers to join their workplace plans, increase their savings rates over time, and invest in diversified portfolios, the report explains.
Millennials Outpace Boomers
In fact, the share of plans that default participants into a savings rate of 5% or more rose from 20% in 2012 to 45% in 2022. Not surprisingly, the interplay between financial challenges and changes in employer-sponsored retirement plans has resulted in different levels of net wealth for each generation based on a starting position in 2019 and modest improvements to the retirement outlook for Millennials and Gen X.
For instance, among late Baby Boomers, high-income workers are on track to meet their retirement spending needs, while low- and middle-income workers are off track. Vanguard researchers estimate that late Boomers at the bottom quartile of the income distribution will be able to sustain retirement spending equal to 64% of pre-retirement income. However, the survey data suggest that current retirees from this working cohort have spending needs of 96% of pre-retirement income.
In addition, Vanguard estimates that Millennials at the 50th income percentile will be able to generate sustainable retirement income equal to 58% of their pre-retirement earnings, which is an 8 percentage-point increase over the sustainable replacement rate for median-income late Boomers at 50%.[1]
Meanwhile, the generational gains in retirement readiness are even larger for higher-income workers. Early Millennials at the 70th percentile of the income distribution scale are on track to reach a sustainable replacement rate of 66%, which the report notes is 15 percentage-points higher than late Baby Boomers, and a level that will enable them to just about meet their projected spending needs in retirement (68%).
“Notably, although many portray younger generations as facing more hurdles for retirement savings, this Vanguard research demonstrates that Millennial and Gen X savers have benefitted significantly from improved defined contribution plan design that encourages saving and investing in age-appropriate asset allocations,” said Fiona Greig, global head of investor research and policy at Vanguard.
Still, a notable exception to this improving outlook is workers at the 25th income percentile, the report warns. Across all three generations, workers in this cohort face a projected retirement savings gap of 32%, whereas high-income families are projected to have a savings surplus of 20% based on expected spending needs. “In other words, the group facing the largest retirement savings gap—lower-income workers—is experiencing no improvement in retirement readiness,” the report states.
Bridging the Gap
To address this gap, the report highlights changes to the retirement system and individual actions that can address this shortfall. Noting that about half of workers participate in a workplace retirement plan and that access for lower-paid and part-time workers and for small-business employees is spotty, Vanguard suggests that initiatives to help this population participate in the capital markets could improve retirement readiness.
To that end, state governments have acted to improve access to retirement savings vehicles through automatic-enrollment IRAs. Employers can also help workers save adequately by adopting best practices in retirement plan design.
For example, under the SECURE 2.0 Act, new workplace plans will automatically enroll all workers. “These plans will also raise participants’ savings rates over time and default them into a diversified portfolio of stocks and bonds appropriate for long-term goals—all best practices in DC plan design,” the report emphasizes.
Employers also have opportunities to accelerate this progress. At the end of 2022, for example, 42% of the employer-sponsored DC plans on Vanguard’s recordkeeping system had yet to adopt automatic enrollment. Plan sponsors can also amplify the impact of these design features by conducting re-enrollment campaigns that periodically default nonparticipants into the plan and “under-saver sweeps” that make sure participants are saving enough to maximize the employer match for their contributions.
And they can implement automatic-portability provisions and other measures to ensure that when workers move from one job to another, their retirement funds remain invested. Finally, Vanguard advises that plan sponsors can evaluate the match schedules in their DC plans, noting that research suggests that current match schedules favor higher-paid workers.
Footnote
[1] The key differences in assumptions among generations are mortality rates, starting net wealth position in 2019, and DB retirement wealth.
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