Financial wellness strategies and benefits that make a difference

2024 was a milestone year for 401(k) plans. ERISA, the legislation that effectively laid the groundwork for the growth of defined contribution plans like 401(k) and 403(b) plans, turned 50. The participation rate for defined contribution plans across all private industry workers reached 50% for the first time. And, early data from Vanguard's annual How America Saves report shows that employers helped workers save and invest more than ever before.

Last year, 401(k) plan account balance averages increased by 10%, driven primarily by positive market performance. It would be tempting to dismiss improvements in workers' savings and investing behaviors as merely a reflection of strong market performance and good luck. However, reflecting on the past 10 years of 401(k) plan data provides evidence that the progress employers, policymakers and recordkeepers have made to improve workplace retirement plans is having its intended effect, steadily and consistently improving behaviors and outcomes for workers.

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Stronger savings behaviors

As 401(k) plans have evolved, employers have leveraged powerful insights from behavioral finance to help workers become better savers and investors. Automatically enrolling employees in a 401(k) plan, for example, makes it simple for workers to overcome inertia and get started saving for retirement. Today, 61% of plans have adopted an automatic enrollment design, an all-time high since Vanguard began tracking this data.

Among plans with automatic enrollment, 61% currently start their employees at a paycheck deferral rate of 4% or higher, a trend that has continued to increase every year. Defaulting employees into higher deferral rates helps them jumpstart their savings. Ten years ago, only 39% of plans began employees at that deferral rate.

During 2024, 16% of participants increased their savings rate in response to targeted education prompts. An additional 29% of participants had their paycheck deferral percentage increased via automatic escalation, leading to 45% of participants increasing their savings, the highest percentage ever tracked in How America Saves.

Increasing your savings while markets are rising, like they were in 2024, may be easier emotionally than diligently contributing to a retirement account in times of volatility. Yet even in 2020, a year with a brief recession, significant market volatility, and an unprecedented global pandemic, 41% of retirement plan participants increased their savings. The evidence is clear: Adopting plan designs that help people start saving earlier and more effectively helps to set employees on the path to long-term investment success.

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Enabling investing success

We're seeing workers make better asset allocation decisions as well. As of year-end 2024, 78% of retirement plan participants had a balanced portfolio, up from 69% of participants ten years ago. A balanced and diversified mix of investments helps to manage risk for investors with a long time horizon, like retirement savers.

The biggest driver of improved investment behaviors in 401(k) plans over the past 10 years is the rise of professionally-managed allocations, either through target-date funds or advice. Today, virtually all 401(k) participants have access to target-date funds and nearly 80% have access to managed account advice services. The percentage of participants using a professionally managed allocation like a target-date fund or advice has increased by more than 50% over the past 10 years.

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The road ahead

Despite steady, optimistic progress, opportunities for improvement remain. Employers should consider how quickly their plan is designed to get participants to a 12%-15% total saving rate, which is widely recognized as a helpful benchmark to enable sufficient retirement savings. Smart plan design features — such as automatic enrollment with automatic increases, high employee default deferral rates, and competitive employer contributions can set employees on the path to investing success.

Additionally, employees face many competing financial priorities along their retirement-savings journey. Employers can offer financial well-being tools that meet the needs of workers at every stage of retirement savings. Offering employees an emergency savings solution, for example, can help workers prepare for the unexpected or short-term expenses they face on the road to retirement.

Student loans, health care savings, credit card debt, and near-term spending goals can also be daunting for workers. In addition to financial well-being resources, employers can help support their workers with cost-efficient, high-quality financial advice to meet participants where they are on their financial journey and help provide personalized solutions for their goals.

2024 was a banner year for progress in 401(k) plans, and 10-year trends in worker saving and investing behaviors only further cemented the reason for optimism. A continued focus on supporting workers at every career stage with personalized financial well-being will help us continue to improve outcomes.