Participants during

the financial crisis:

Total returns 2005–2010

Vanguard research November 2011

Executive summary. For the 2005–2010 period, the typical defined

contribution (DC) plan participant earned an average annual return of 3.76% Authors*
and a cumulative return of just over 20%. In other words, for the typical Stephen P. Utkus
Shantanu Bapat
participant, retirement wealth invested over the period grew by one-fifth
because of investment results, despite the 2008–2009 market decline.
Portfolios selected by participants were more highly dispersed in terms
of risk and return than professionally managed target-date funds or
managed accounts.

Realized total returns. Over the 2005–2010 period, the typical DC plan
participant at Vanguard earned a 3.76% average annual total return and
a cumulative return of 20.27%. Ninety-five percent of participants earned
a positive total return over the five years. Over the shorter 2007–2010
period, total returns were breakeven.

* The authors would like to thank John Lamancusa for his research assistance.
Past performance is not a guarantee of future results.

Connect with Vanguard > vanguard.com

 Dispersion of outcomes. Returns on participant-constructed portfolios are much more
highly dispersed than those of professionally managed portfolios such as single target-date
or managed account strategies. For example, five-year returns for single target-date investors
ranged narrowly from 3.62% to 4.65% per year (for the 5th and 95th percentiles) with a mean
of 3.93%. Among participants making choices on their own, five-year returns varied widely
from –0.02% to 8.09% per year, with a mean of 3.76%. Portfolio risk (volatility) levels are
also characterized by extreme values among participants making their own choices.

[Note: All investing is subject to risk. Investments in target-date funds are subject to the risks of their underlying
funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund
would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments
to more conservative ones based on its target date. An investment in a target-date fund is not guaranteed
at any time, including on or after the target date. Diversification does not ensure a profit or protect against
loss in a declining market.]

Age and total returns. Among single target-date and managed account investors, equity
exposure declines in a disciplined way over time, while among all other participants it is
“hump-shaped.” For participants approaching retirement, ages 55–64, retirement wealth
invested over the 2005–2010 period grew by 21% for the average participant and by 24%
among single target-date investors. Older single target-date investors not only realized
higher returns but also had higher Sharpe ratios.1

Implications. These results underscore the importance of evaluating DC plan performance

and retirement wealth accumulation over longer time horizons. Despite the historic market
shock of 2008–2009, DC account wealth accumulation was positive over five years because
of investment results alone—before considering the effect of contributions. This is also true
for single target-date investors, including those nearing retirement. For plan fiduciaries, our
results draw attention to the widely dispersed nature of participant outcomes. Strategies like
target-date funds, managed accounts, and reenrollment into a qualified default investment
alternative (QDIA) can be considered as ways to mitigate extreme portfolio choices.

1 The Sharpe ratio is defined as the average annual return of a participant portfolio, minus the risk-free (Treasury bill) rate over the period,
divided by the standard deviation of the participant’s portfolio.

2
Introduction
DC plan participants endured a historic equity market
shock during the 2008–2009 period, when stock
markets fell by more than half in response to the
global financial crisis. In previous Vanguard research,
we have shown that retirement wealth accumulation—
including investment performance and ongoing plan
contributions—was positive for most participants
over the years surrounding the market decline.2 In this
paper we consider a narrower question: How did
participant retirement accounts perform when
measured solely in terms of investment results?
This examines participant total returns over the
2005–2010 period.3 Total returns are the most
common measure of investment skill or performance.
In simple terms, they represent the results of investing
$1 over a given period. They reflect solely the impact
of investment decisions, independent of cash flows
related to participant accounts (such as contributions
and any loans or withdrawals). Participant total returns
are comparable to widely published measures
of investment performance, such as index returns
and fund performance returns. Like individual fund
performance results, but unlike index returns,
participant total returns are net of all fees and
expenses specific to a given participant’s account.4
After a brief review of methodology and the market
environment, the paper presents several views of
participant total returns and shows how they vary
by portfolio strategy and participant characteristics
such as age. In particular, the strategy section
examines return differences among participants who
held a single target-date fund, invested in a managed
account advisory service, or held any other type
of portfolio over the five-year period. The paper
also presents various measures of the dispersion
or distribution of participant returns. Participant
asset allocations can be highly skewed, and
returns accordingly are dispersed.
2 How America Saves, 2011.
3 For an analysis of the effects of 2011 market volatility on participant portfolios, see Clark and Young, 2011.
4 Returns that are weighted according to the unique cash flow patterns of participants’ accounts, such as ongoing contributions, are known generally
as cash-flow-weighted returns or, in Vanguard recordkeeping terminology, personal rates of return. Over the 2005–2010 period, personal rates of return
were slightly higher than total rates of return. See How America Saves, 2011, Figures 73–75.
5 Total returns are calculated for Vanguard participant portfolios from cash flow to cash flow, and then linked over time, in accordance with global
investment performance standards.
Caveats
Several caveats should be kept in mind while reviewing
the findings of our analysis. First, realized total returns
reflect investment results for a specific period,
and are conditional to the market and investment
conditions prevailing during that time. As noted
below, the 2005–2010 period was unusual in that
the equity risk premium for U.S. stocks was negative,
and was close to zero for international stocks. Future
results can be expected to be quite different in a more
normal period with a positive equity risk premium.
Second, realized returns over the period reflect the
impact of several portfolio characteristics, including
asset allocation, subasset allocation, fund selection,
rebalancing, and fees. Given this wide range of
factors influencing portfolio outcomes, results across
participants and results across different strategies
should be expected to vary over future periods.
In other words, this period’s underperformance could
be a harbinger of the next period’s outperformance,
and relative results should be judged over time.
Finally, it’s important to emphasize that the total
returns shown here reflect investment performance
only. Growth in retirement wealth would be even
higher than we are showing here for any given
period among those making ongoing contributions.
Methodology
Our data is drawn from Vanguard’s recordkeeping
systems encompassing more than three million DC
plan participants. Total returns were calculated each
month for participant accounts over the period from
December 2005 to December 2010.5 Total returns
are net of all fees and expenses associated with the
investment options held by the participants, as well
as any separate account-based recordkeeping
charges such as per-capita recordkeeping fees.
3
 When presenting one-, three-, and five-year returns, we
use a dataset of all participants with corresponding
one-, three-, or five-year account histories, as well
as complete demographic and asset allocation data.
This dataset is referred to as the “all participants”
sample, and includes 2.62 million participants with
a one-year history, 1.98 million participants with a
three-year history, and 1.43 million participants
with a five-year history.6
Finally, company stock as a portfolio holding creates
a higher degree of volatility in returns, and the most
extreme return outcomes—positive and negative—
are associated with concentrated company stock
positions. Approximately 12% of the five-year dataset
includes participants with a concentrated position in
employer securities—that is, a position that exceeds
20% of their account balance. Because they are only
a small portion of the sample, their results are
included within the totals for all participants.
Market environment
During the 2005–2010 period, global stock prices
increased steadily through 2007, reaching a peak in
October of that year (Figure 1). Stock prices then fell
precipitously during the bear market of 2008–2009—
which was similar in scope to other historic market
declines, such as the 1974–1975 bear market. Stock
prices partially recovered through the end of 2010.
In terms of average annual returns, U.S. stocks
gained 3.0% per year over the five-year period, while
U.S. bonds returned 5.8% (Figure 2). In other words,
relative to U.S. bonds, the U.S. equity risk premium
was a negative 2.8% per year over five years.
International stocks generated a 5.3% annualized
return, just shy of U.S. bond market returns.

Figure 1. Market performance 2005–2010

Cumulative total return for select market indexes

180
Index value

100

20
Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

Treasury bills U.S. bonds U.S. stocks International stocks

Note: See figure 2 for corresponding indexes. All values set at 100.0 as of month-end December 2005.
Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly
in an index.
Sources: Citigroup, Barclays, MSCI.

6 One- and three-year returns are not materially different if they are presented only for the five-year panel of 1.43 million participants. Presenting returns
for only the five-year panel leads to an inherent bias in the data, as it reports on results only for participants with five years or more of plan tenure.

4
 Figure 2. Market returns and volatility

For the period ended December 31, 2010

Annualized Cumulative Volatility

total returns total returns (s)*
60
Asset class Index 1 year 3 years 5 years 1 year 3 years 5 years months
Inflation Consumer Price Index (Urban) 1.5% 1.4% 2.1% 1.5% 4.4% 10.9% 3.0%

Cash reserves Citigroup T-bill Index 0.1% 0.7% 2.3% 0.1% 2.1% 12.0% 0.6%
U.S. bonds Barclays U.S. Aggregate Bond Index 6.5 5.9 5.8 6.5 18.8 32.6 3.6
U.S. stocks MSCI U.S. Broad Market Index 17.3 –1.7 3.0 17.3 –4.9 16.2 18.3
International stocks MSIC All Country World Index ex-US 11.6 –4.6 5.3 11.6 –13.1 29.3 22.5

* Annualized standard deviation of monthly returns over the 60-month period ended December 31, 2010.

Bonds offered the highest cumulative return over Figure 3. Participant total returns
2005–2010, with a dollar at the beginning of the
period growing to $1.33. International stocks came Defined contribution plan participants, for the period ended
close to matching these results, with $1.00 growing December 31, 2010
to $1.29 over five years. Meanwhile, U.S. stocks 25%
meaningfully underperformed U.S. bonds, with a
20.27%
dollar invested in U.S. stocks growing to $1.16.

Participant total returns

12.22% 12.22%
The typical Vanguard DC plan participant earned an
average annual return of 3.76% and a cumulative
return of 20.27% over the 2005–2010 period (Figure 3).
In effect, for the average participant, retirement 3.76%

wealth over the five-year period grew cumulatively 0.11% 0.33%

by one-fifth because of investment results. 0%
Average annual Average cumulative
total returns total returns
Results for the shorter 2007–2010 period reflect the 1 year 3 years 5 years
fact that the beginning of the period occurred close
Note: Includes 2,623,615 participants for the 1-year period; 1,979,116 participants
to the peak of U.S. stock prices. Over the 2007–2010 for the 3-year period; and 1,432,404 participants for the 5-year period.
period, the average participant essentially broke Source: Vanguard, 2011.
even in investment returns, realizing a total return
of 0.11% per year and a cumulative total return of
0.33%. On a one-year basis, the average participant
earned a 12.22% annual return, reflecting the recovery
of stock prices during 2010.

5
 Dispersion of returns
One characteristic of participant portfolios is the
tendency of many to adopt unconventional or even
extreme investment allocations. Some participants
may invest their entire portfolio in equities or invest
exclusively in low-risk money market or stable value
assets. Participant portfolios may also be concentrated
in a single fund, in a certain management style,
in a specialty asset class, or in company stock.
As a result, participant total returns tend to be
dispersed or distributed over a wide range.
Over the five-year period, among all participants in our
sample, the average participant portfolio gained 3.76%
per year, while the 5th percentile portfolio earned
0.00% per year, and the 95th percentile portfolio
gained 8.02% per year (Figure 4). On a cumulative
These statistics illustrate the wide variation in portfolio
construction among individual participants. They also
demonstrate that, over the five-year period, 95%
of participants earned a positive investment return
on their account, while over the three-year period,
about half did and half did not.
Figure 4. Distribution of participant total returns
All DC plan participants for the period ended December 31, 2010
25.00%
20.81%
15.17%

basis, the 5th percentile participant saw a $1.00 12.22%

investment stay at $1.00, while the 95th percentile
9.89%
participant saw a $1.00 investment grow to $1.47. 8.02%

5.65% 4.62%
Similarly, from 2007 to 2010, the 5th percentile 3.76%
participant portfolio lost 5.13% per year, while 1.69% 2.66%
0.68%
the 95th percentile portfolio gained 5.65% per year. 0.00% 0.11% 0.00%

On a cumulative basis, the 5th percentile participant –1.64%

saw a $1.00 investment fall to $0.85, while the 95th

–5.13%
percentile participant saw a $1.00 investment grow
to $1.18.
–10.00%
1 Year 3 Years 5 Years

Reading a box-and-whisker graph: Top of line represents 95th percentile; top of

box, 75th; diamond, average; bottom of box, 25th, and bottom of line, 5th.
Note: Includes 2,623,615 participants for the 1-year period; 1,979,116 participants
for the 3-year period; and 1,432,404 participants for the 5-year period.
Source: Vanguard, 2011.

6
Impact of target-date funds
and managed accounts
Participant portfolio strategies in DC plans are being
reshaped by two innovations: target-date funds
and managed account advisory services. These
innovations have introduced professionally
managed approaches to portfolio construction
in DC participant accounts.
We separately calculated five-year total returns
for participants investing in a single target-date fund
or through a managed account service, and compared
them with the returns for all other participants.
Under our approach, the target-date or managed
account participant had to maintain this strategy over
the full 60-month period. For the five-year period, we
observed 16,869 participants in a single target-date
fund, and 6,685 participants in a managed account
advisory service. They are compared with 1.41
million participants who are invested otherwise.7
Both target-date funds and managed accounts have
contributed to a substantial reduction in extreme
portfolio outcomes (Figures 5 and 6). Over the five-year
period, single target-date investors fell within the
narrowest range of returns—from 3.62% per year
for the 5th percentile portfolio to 4.65% for the 95th
percentile portfolio. Managed account returns were
somewhat more dispersed, ranging from 2.20%
per year at the 5th percentile to 5.06% at the 95th
percentile, but still relatively compact compared to all
other participants. Returns for all other participants
ranged from –0.02% for the 5th percentile investor
to 8.09% for the 95th percentile investor.
Figure 6. Distribution of five-year returns by strategy
All defined contribution participants, five-year annualized total
returns for the period ended December 31, 2010
9.00%
8.09%

Figure 5. Distribution of five-year returns by strategy

All defined contribution participants, five-year annualized

total returns for the period ended December 31, 2010 5.06%
4.65% 4.64%
Annualized five-year returns 4.22%

Single 3.65% 3.76%

3.62%
target-date Managed All other
3.08%
fund account participants 2.66%
Mean 3.93% 3.65% 3.76% 2.20%

5th percentile 3.62 2.20 –0.02

25th percentile 3.62 3.08 2.66
50th percentile 0.00% –0.02%
(median) 3.90 3.66 3.80
75th percentile 3.90 4.22 4.64 –1.00%
Single Managed All other
95th percentile 4.65 5.06 8.09 target-date account participants
fund*
Source: Vanguard, 2011.
Reading a box-and-whisker graph: Top of line represents 95th percentile; top of
box, 75th; diamond, average; bottom of box, 25th, and bottom of line, 5th.
* Single target-date fund: 95th percentile is 4.65% ; 75th, 3.90%; mean, 3.93%;
25th and 5th, 3.62%.
Note: Includes 16,869 single target-date investors, 6,685 managed account
investors, and 1,408,850 other participants over the 5-year period.
Source: Vanguard, 2011.

7 Over the five-year period, participants who were in single target-date funds or a managed account advisory service for less than the full period,
or participants with a partial position in a target-date fund, are included in “all other participants.”

7
 Dispersion of risk and return characteristics
Differences among these three investment
approaches are particularly apparent when examining
both return and risk measures. To present these
differences graphically, we created a random sample
of 1,000 participants holding a single target-date
fund, a managed account, or any other strategy over
five years.8
activity (or a lack thereof) over time; and differences
in recordkeeping and investment fees across plans
and fund options. For example, more dispersed total
returns might reflect the fact that a participant is
overweight in small-cap or emerging market stocks;
has a large position in an actively managed equity
fund; has all of the portfolio in money market or
stable value assets; or has his or her portfolio
concentrated in employer securities.10

Single target-date investors fall in a narrow band
of risk and return because virtually all the target-date
portfolios in our sample are a specified combination
of indexed U.S. equities, international equities,
and U.S. bonds (Figure 7, Panel A). In fact, the lack
of dispersion in returns for single target-date investors
creates a misleading visual effect in this graph. All
three graphs have the same number of observations.
But in the target-date panel, because most of the
points are identical and fall on top of one another,
there appear to be dramatically fewer observations
than in the other charts.
Results for managed account investors are more
dispersed than those for single target-date investors,
reflecting the fact that the advice service varies
asset allocation not only by age but also by other
factors such as risk tolerance and prior holdings
(Figure 7, Panel B). Managed account portfolios
include active manager risk and, in some cases,
limited exposure to company stock. Some managed
account strategies may also take non-plan assets
into account—in which case the plan results shown
here may be tailored around those non-plan holdings.9
The greatest dispersion is among all other
participants (Figure 7, Panel C). Why do we see such
widely dispersed portfolio results? Reasons include
asset allocations overweighted to specific subasset
classes; active manager risk exposure; concentrated
positions in employer stock; trading and rebalancing
In reviewing these measures of dispersion, it’s
important to recall that during this period the equity
risk premium was negative. In a more typical period,
in which equity returns are higher than fixed income
returns, it is likely that all measures of return will be
more diffuse. For example, in such an environment,
single target-date fund investors with high equity
allocations will have higher returns than single
target-date fund investors with low equity allocations—
unlike the current environment, in which equity
returns have been lower than fixed income returns.
That said, it’s likely that, even in a different risk
environment, the relative ranking of these results
would remain the same, with single target-date
investors having the more compact results, managed
account investors having a somewhat more dispersed
“cloud” around the target-date results, and all other
participants having more scattered results.
Finally, one important point to mention here is that
the number of single target-date holders has grown
significantly over the five-year period. These five-year
results are backward-looking and reflect a period when,
in our sample, only 1% of participants were in a single
target-date fund for all five years. By comparison, at
the end of 2010, one-fifth of all Vanguard participants
were invested in a single target-date fund. Over time,
the dispersion of all participant outcomes is declining
as a result of strategies like target-date funds
and managed accounts—as well as traditional
balanced funds.

8 Because administrative processing of accounts can lead to extreme returns, both positive and negative, we eliminated 0.5% of the top and bottom of both
the risk and return distributions—i.e., a total tail reduction of 2%—leaving 980 observations in each panel of Figure 7.
9 The managed account service may also take into account other individual factors such as other benefit plans and plan contribution rates.
10 The dispersion for all other participants is even greater than the chart indicates because approximately 6% of participants in this group hold a balanced
portfolio, which would have highly predictable results similar to those of target-date funds. Removing this group would make the remaining results even
more diffuse.

8
 Figure 7. Risk and return characteristics with benchmarks

Defined contribution participants for the five-year period ended

December 31, 2010
A. Single target-date participants
15%
Five-year annualized total return

U.S. bonds Non-U.S. stocks

U.S. stocks
0%

–15% 0% 10% 20% 30% 40%

Five-year annualized standard deviation

B. Managed account participants

15%
Five-year annualized total return

U.S. bonds Non-U.S. stocks

U.S. stocks
0%

–15%
0% 10% 20% 30% 40%
Five-year annualized standard deviation
C. All other participants
15%
Five-year annualized total return

U.S. bonds Non-U.S. stocks

U.S. stocks
0%

–15% 0% 10% 20% 30% 40%

Five-year annualized standard deviation

Participants Benchmarks

Note: Includes random sample of 1,000 participant accounts drawn from respective samples for single
target-date, managed account, and all other participants. Excludes 0.5% top and 0.5% bottom outliers
for both risk and return, for a net sample of 980 observations.
Source: Vanguard, 2011.

9
 Regardless of the measure of dispersion, some
participants’ more extreme portfolio construction
strategies resulted in exceptionally positive results
over the period and some resulted in very poor results.
For many others, investment results were scattered,
seemingly unpredictably, across the risk-return space.
For plan fiduciaries, an important question to weigh
is whether such dispersion of outcomes reasonably
reflects individual participants’ desires for portfolio
customization—or their lack of skill at portfolio
construction.
Comparing average returns
Over the five-year period, the average annual return for
a single target-date participant was 3.93%, compared
with 3.65% for the typical managed account participant
and 3.76% for all other participants. This represents
a relative performance advantage for the single
target-date investor of 28 basis points compared
with a managed account investor, and 17 basis
points compared with all other participants.
The range of returns reflects meaningful portfolio
differences in asset allocation, subasset allocation,
fund selection, rebalancing, and fees. For example,
the target-date funds in our sample are overwhelmingly
passive or indexed, while the managed account
portfolios and portfolios of all other participants
generally include active management for both equities
and fixed income. Participants in each group also differ
demographically. Single target-date fund participants
tend to be younger, managed account participants
tend to be older, and all other participants are
distributed across many age groups.
The return results for all other participants are
particularly affected by concentrated company stock
exposure. Single target-date investors have zero
exposure to company stock, and some managed
account participants may have limited exposure,
but the “all other participants” group includes some
investors with concentrated positions. To adjust
for this factor, we estimated an ordinary least
squares (OLS) regression of five-year returns,
10 
controlling for company stock and the type of investor
(single target-date, managed account, all other). In this
regression model (Figure 8), the difference in returns
between managed account investors and investors
in a single target-date fund remains at 28 basis points
over five years, meaning that differences between
the two strategies are unrelated to idiosyncratic
company stock exposure.
However, using this regression, the difference in
returns between single target-date investors and all
other participants widens to 40 basis points. In other
words, part of the relative advantage of all other
participants was related to exposure to
nonsystematic or idiosyncratic risk of company stock,
which contributed to returns over this period. Once
we put target-date funds and all other participants
on an equal, diversified portfolio footing by removing
company stock differences, the return disadvantage
for all other participants is 40 basis points.
Figure 8. Regression adjusting for single-stock risk
Five-year annualized returns relative to single target-date fund
0.5%
0.0%
–0.17%
–0.28% –0.28%
–0.40%
–0.5%
Managed account All other participants
Unadjusted Adjusted
Note: Unadjusted effects are differences in five-year mean returns. Adjusted
results are from OLS regression of five-year returns against fraction of portfolio
in company stock and dummy variables for investment strategy.
Source: Vanguard, 2011.
Return variation by age
Over the five-year period, there were minor
differences in returns among different age groups
(Figure 9). This stands to reason, given the quite
narrow differences in five-year returns in stock and
bond market indexes. For example, participants
under age 25 earned the highest median return of
4.18%; the lowest was 3.71% among participants
ages 35–44. The differences in returns are similar
for three-year results, but widen over one year.
For example, comparing one-year returns for those
under age 25 with returns for those age 65 and older,
the younger group gains an advantage of around
4 percentage points.
Meanwhile, of note is the fact that the average
participant approaching retirement, ages 55–64,
earned a median return of 3.82%. This is equivalent
to a cumulative growth of 21% in retirement wealth
invested over the five-year period related solely to
investment results. Another notable feature is that
returns across income levels and account balances
are also largely similar. In other words, there are not
large return differences among more and less
affluent participants.
Age is an increasingly important determinant of
participant investment strategies, particularly with
regard to target-date and managed account advisory
services. As a result, we examined our three
participant strategies by age and various portfolio
characteristics. Portfolio characteristics include
equity exposure over the period, annual total returns,
annual portfolio standard deviations, and Sharpe
ratios (a measure of return per unit of risk). For each
age group, we report on median results for the typical
participant. In reviewing these results, keep in mind
that results for all other participants are much more
dispersed around the median than results for single
target-date or managed account investors.
Figure 9. Total returns by participant characteristics
Defined contribution plan participants
for the period ended December 31, 2010
1 year 3 years 5 years
All participants (mean) 12.22% 0.11% 3.76%
All participants (median) 13.02 –0.04 3.80
Age
<25 13.52% 1.03% 4.18%
25–34 13.34 0.37 3.88
35–44 12.95 –0.05 3.71
45–54 12.23 –0.05 3.70
55–64 11.15 0.22 3.82
65+ 9.56 0.65 3.83
Household income
<$30,000 12.04% 0.49% 3.83%
$30,000– $49,999 11.90 0.51 3.84
$50,000– $74,999 12.19 0.24 3.80
$75,000– $99,999 12.31 0.00 3.75
$100,000+ 12.44 –0.30 3.67
Gender
Male 12.53% 0.07% 3.84%
Female 11.77 0.13 3.60
Job tenure (years)
0–1 12.19% –0.33% 3.44%
2–3 13.72 –0.08 3.75
4–6 12.91 0.09 3.88
7–9 12.00 0.24 3.72
10+ 11.80 0.09 3.76
Account balance
<$10,000 11.52% 0.76% 3.79%
$10,000– $24,999 12.17 0.40 3.78
$25,000– $49,999 12.36 0.09 3.78
$50,000– $99,999 12.46 –0.16 3.75
$100,000– $249,999 12.52 –0.28 3.76
$250,000+ 12.69 –0.04 3.97
Note: Includes 2,623,615 participants for the 1-year period; 1,979,116 participants
for the 3-year period; and 1,432,404 participants for the 5-year period. Average
returns within category.
Source: Vanguard, 2011.
11
 Age profile of equity exposure. By design, for both
single target-date and managed account strategies,
median equity exposure follows a disciplined, declining
profile over time (Figure 10, and Figure 11, Panel A).
The reduction in equity exposure is steeper among
single target-date investors than among managed
account investors, but both age profiles are downward-
sloping over time. Meanwhile, the equity allocation
for all other participants is characteristically hump-
shaped by age. Younger participants tend to be less
sophisticated or knowledgeable, and so tend to
overweight conservative investments such as money
market and stable value holdings.11 Many younger
investors likely enrolled during volatile market
conditions, and so may have adopted more
conservative allocations as a result. As shown here,
and as demonstrated in other Vanguard research,
young target-date fund investors maintain a meaningful
commitment to equities, and do not demonstrate
the overreaction to market volatility of other
younger investors.12
Realized returns. At younger ages, particularly among
participants under age 45, single target-date investors
and all other participants realized similar returns
(Figure 10, and Figure 11, Panel B). But these returns
likely arose from quite different strategies. Among all
other participants, results were strongly influenced
by stable value and money market returns; among
target-date investors, results were more influenced
by bond and international stock returns.

Figure 10. Investment characteristics by age and investment strategy

Defined contribution plan participants for the five-year period ended December 31, 2010

A. Equity exposure <25 25–34 35–44 45–54 55–64 65+ All

Single target-date fund 89.0% 90.0% 89.0% 76.0% 61.0% 40.0% 76.0%
Managed account N/A 85.0 85.0 79.0 67.0 51.0 76.0
All other participants 61.0 76.0 80.0 77.0 68.0 55.0 74.0
All participants 76.0 77.0 81.0 77.0 67.0 55.0 75.0

B. Annualized return
Single target-date fund 3.79% 3.78% 3.62% 3.90% 4.42% 4.65% 3.90%
Managed account N/A 3.08 3.22 3.58 3.96 4.28 3.66
All other participants 3.90 3.81 3.74 3.74 3.81 3.82 3.80
All participants 3.90 3.81 3.73 3.75 3.82 3.84 3.80

C. Annualized standard deviation

Single target-date fund 17.1% 17.2% 17.1% 14.8% 12.0% 8.4% 14.8%
Managed account N/A 17.2 15.8 14.7 12.2 9.3 14.2
All other participants 12.0 15.5 16.0 15.1 13.2 10.8 14.7
All participants 14.8 15.7 16.1 15.1 13.2 10.7 14.8

D. Sharpe ratio
Single target-date fund 0.09 0.09 0.08 0.11 0.18 0.28 0.11
Managed account N/A 0.05 0.06 0.09 0.14 0.21 0.10
All other participants 0.17 0.11 0.10 0.10 0.13 0.18 0.11
All participants 0.11 0.11 0.10 0.11 0.14 0.19 0.11

Note: Includes 1,432,404 participants for the five-year period (16,869 single target-date, 6,685 managed account, and 1,408,850 other participants). Results for managed
accounts under age 25 are excluded because of a neglible sample size. Medians within category.
Source: Vanguard, 2011.

11 Some participants may be in these conservative asset allocations because of default policies of the plan sponsor. Although many plans moved to a QDIA
during the period, some portion of participants may have been defaulted to a conservative option—or been indirectly influenced in making their own choice
by the default designation in their plan.
12 Ameriks and Utkus, 2011.

12 
 Figure 11. Investment characteristics by age and investment strategy

Defined contribution participants for the five-year period ended December 31, 2010
A. Median monthly equity allocation B. Median annual total return
100% 5.0%

80% 4.0%

Five-year annualized return

Equity allocation

60% 3.0%

40% 2.0%

20% 1.0%

0% 0%
<25 25–34 35–44 45–54 65+ <25 25–34 35–44 45–54 65+
Age Age

C. Median annual standard deviation D. Median Sharpe ratios (all participants)

20% 0.30
Annualized standard deviation

15%
0.20
Sharpe ratio

10%

0.10
5%

0% 0.00
<25 25–34 35–44 45–54 65+ <25 25–34 35–44 45–54 65+
Age Age band

Single target-date participants Managed account participants All other participants

Note: Includes 1,432,404 participants for the five-year period (16,869 single-target date, 6,685 managed account, and 1,408,850 other participants).
Results for managed accounts under age 25 are excluded because of a negligible sample size. Medians within category.
Source: Vanguard, 2011.

Among older participants, ages 55–64, single target- It is worth noting that the median five-year return
date investors realized higher returns than other for single target-date investors approaching retirement
participants. The reason for this result is two-fold. was 4.42%, equivalent to a cumulative return of 24%
First, target-date funds have a lower equity risk over the period. In other words, among single target-
exposure than the investments older participants date investors nearing retirement, retirement savings
choose on their own (Figure 10, Panel A). Second, invested over the period grew by nearly a quarter,
target-date funds use bonds for their fixed income despite the market volatility. This growth is related
holdings rather than stable value and money market to investment results alone and does not include
funds, and also diversify stocks internationally, which the benefit of additional contributions.
were relatively beneficial strategies over the period.

13
 Among all age groups, the managed account strategy
generated somewhat lower median returns than
a single target-date strategy over the period. This
difference is attributable to the factors noted above,
including asset allocation, subasset allocation,
fund selection and rebalancing policies, and fees.
For participants ages 55 and older, the managed
account strategy outperformed the strategies
of all other participants but underperformed
the single target-date strategy.
Portfolio risk and Sharpe ratios. For single target-date
and managed account strategies, the five-year
annualized standard deviation of returns is virtually
identical by age (Figure 10, and Figure 11, Panel C).
For all other participants, the risk profile reflects the
typical hump-shaped exposure to equities. At younger
ages, all other participants had somewhat higher
Sharpe ratios—reflecting the benefit of conservative
assets like money market funds and particularly stable
value assets during this volatile period (Figure 10, and
Figure 11, Panel D). Participants ages 55–64 appear
to have benefited from the higher bond allocations
and internationally diversified equity exposure in
target-date funds. Pre-retirees in single target-date
funds had somewhat better risk-return results over
this period than their peers in that age group, whether
those peers were in a managed account service
or investing on their own.
13 See Burns, Utkus, and Combs, 2008; and Utkus and Mottola, 2009.
14 
Implications
Despite the historic equity market decline of
2008–2009, most participant portfolios earned
positive investment returns over the 2005–2010
period, and retirement wealth invested over the
period grew by one-fifth for the average participant
because of investment results alone. DC plan
participants approaching retirement, including older
single target-date investors, had similar or better
results. These findings underscore the fact that
retirement wealth can continue to grow over longer
time horizons, despite extreme market declines in
the short run. This account growth is related only
to investment results and does not consider the
additional benefit of ongoing contributions.
One quite distinctive characteristic of participant
portfolios is the tendency for self-directed portfolios
to be highly dispersed in terms of both risk and return.
By comparison, single target-date and managed
account strategies result in a much narrower range
of investment outcomes, consistent with their more
disciplined investment approaches. For plan fiduciaries,
the question is whether such highly dispersed
outcomes are an inevitable result of participants’
desires to customize their portfolios—or whether
they reflect participants’ lack of skill at portfolio
construction. Sponsors concerned about the dispersion
of portfolio outcomes will want to consider not only
target-date funds and advice services like managed
accounts, but also the strategy of reenrollment into
a QDIA.13
It is again worth emphasizing that historic returns
reflect investment results from a given set of market
and investment conditions. Portfolio returns have
to be evaluated in a variety of market settings,
and are just one of the factors sponsors and
participants should consider in evaluating
investment portfolios over time.
References
Ameriks, John A. and Stephen P. Utkus. 2011.
Generations: Key drivers of investor behavior.
institutional.vanguard.com

Burns, David M., Stephen P. Utkus, and Ann L.

Combs, 2008. Improving plan diversification through
reenrollment in a QDIA. institutional.vanguard.com

Clark, Jeffrey W. and Jean A. Young, 2011.

Participation reaction to the August 2011 market
sell-off. Vanguard Center for Retirement Research.
institutional.vanguard.com

How America Saves 2011: A report on Vanguard

2010 defined contribution plan data. Vanguard Center
for Retirement Research. institutional.vanguard.com

Utkus, Stephen P. and Gary R. Mottola, 2009.

Reenrollment and target-date funds: A case study
in portfolio reconstruction. Vanguard Center for
Retirement Research. institutional.vanguard.com

Utkus, Stephen P. and Jean A. Young. 2011.

The great recession and 401(k) plan participant
behavior. Vanguard Center for Retirement Research.
institutional.vanguard.com

15
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