The Value of Personalized Glide Paths for Plan Participants

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  • Strategic asset allocation is a key driver of investment success.
  • Advice from Vanguard provides strategic asset allocation through Personalized Glide Paths.
  • Personalized Glide Paths work best when an investor provides the service with their unique personal information.
  • Participants who are defaulted into Advice from Vanguard are set up for success, but they will receive the most value by personalizing their information.

Introduction to Personalized Glide Paths

Choosing a strategic asset allocation is foundational to portfolio construction. It determines what mix of investments an investor will hold, and their associated risk and returns, as the investor grows their wealth and strives to meet their goals.

An investor’s strategic asset allocation typically changes over time, usually becoming less risky and more financially stable once withdrawals are needed in retirement. This process is called a glide path. Glide paths vary depending on individual circumstances, such as an investor’s time horizon, desired retirement age, tolerance for risk, and other factors.

This paper will describe how Advice from Vanguard for plan participants (hereafter called “Advice”) strategically invests participant assets through Personalized Glide Paths (PGP).

Vanguard Life-Cycle Model

At the heart of the PGP methodology is the Vanguard Life-Cycle Investing Model (VLCM). The VLCM is a utility-based framework1 that combines individual characteristics, behavioral finance2, and risk-return trade-offs to construct customized glide paths. The glide path Advice recommends is the one that VLCM projects will provide that investor with the greatest utility.3

Information Used in Glide Path Recommendations

PGPs consist of over 1,000 glide paths created by the VLCM. Each glide path is intended to address unique investment scenarios. The scenarios are based on a combination of the following pieces of information:
Attribute Description
Retirement Age The age at which the investor plans to retire.
Current Age The investor’s current age.
Time Horizon The timespan the investor expects to live in retirement.
Risk Aversion An investor’s sensitivity to long-term volatility of returns.
Loss Aversion An investor’s sensitivity to short-term losses and preference for avoiding losses versus seeking gains.
Marital Status4 Whether the portfolio will support one person or two.
Concentrated Equity5 Whether an investor prefers to hold investments in a single company, such as through a company stock fund.
Savings Rate How much employment income the investor is saving for retirement.
Retirement Income How much of the investor’s employment income will be replaced with Social Security benefits and pension income after retirement.
Each individual investor’s combination of factors generates its own personalized glide path that best fits that individual’s situation.
Assessing Investor Risk and Loss Aversion
Risk and loss aversion have the greatest impact on glide path construction. A glide path should closely align with an investor’s tolerance for risk. Otherwise, the investor may be more prone to negative behaviors that can affect their investing success, such as performance chasing, market timing, or abandoning their plan altogether.

Advice uncovers an investor’s risk and loss aversion through a three-question assessment powered by Vanguard’s forecasting and allocation models. The questions provide ranges of potential investment outcomes based on information provided by the investor and plan sponsor, making them both realistic and relevant to the investor. The investor chooses the outcomes that most closely align with their attitude toward risk and return. The assessment then determines the investor’s risk and loss aversion.

An investor’s attitude toward risk can change over time based on personal experiences or changes in economic circumstances. Investors can change their risk aversion within guardrails through the user experience interface as needed. Investors can adjust their loss aversion by retaking the assessment. If the investor tries to change their risk aversion profile setting significantly, they will be offered the option of retaking the assessment and updating their loss aversion setting.

How Advice Obtains Information from Participants

How a participant is enrolled in advice determines how Advice obtains the information used for building their individual glide path. A participant can enroll in two ways: voluntarily or automatically.
Voluntary Enrollment
When a participant enrolls voluntarily, they engage in the enrollment experience and provide Advice with all the information needed to recommend a Personalized Glide Path.6 Additionally, they will be presented with Advice’s full suite of investment management and financial planning services.
Automatic Enrollment
A sponsor can also enroll a participant automatically. In this situation, the participant is assigned a glide path based on plan default assumptions. They will remain in this default glide path until they personalize their investor profile. Once they personalize their profile, the participant will receive an updated investment plan and trades may be placed automatically to align the investor’s portfolio with the new plan. At that point, Advice’s suite of other services will also become available to the participant.

Auto-enrolling participants into Advice places them on better footing than if their savings were invested in a target-date fund. A 2023 analysis by Vanguard’s Enterprise Advice methodology team estimated that 86% of participants whose accounts were auto-enrolled into Advice received more utility than if their account balances had been invested in a target-date fund (fund and advisory fees considered).7

Although it offers a strong starting point, auto-enrollment in Advice does not provide as much utility as voluntary enrollments. This is because Advice does not yet have access to all the information that it needs to choose the best glide path for a given investor situation. Once the participant shares this information by updating their investor profile, they will receive the greatest utility.

Changing Advice Service Providers

One reason a plan sponsor might automatically enroll their participants Advice is when changing advice offers in their plan. The plan sponsor must decide whether to auto-enroll its currently advised participants in the new service. Most of the information used by the previous advisory service does not transfer to Advice. Thus, default assumptions are made so participants can get started with the new service.

When transitioning to Advice from Vanguard, advised participants are notified of the upcoming change. They also are encouraged to personalize their investor profiles before the transition. If they do this, their PGP will be implemented upon plan conversion. Those who don’t will receive a default glide path. Defaulted participants can personalize their profiles at any time to receive a PGP.

Default Glide Path

Advice and the plan sponsor share the responsibility for selecting a default glide path. Together, both parties decide which settings to use for each PGP attribute. Some settings are based on record-kept data, where available (Current Age, Savings Rate, and Retirement Income). Advice makes certain selections (Loss Aversion, Marital Status, and Concentrated Equity8). And others are selected by the plan sponsor, supported by Advice (Retirement Age, Time Horizon9, and Risk Aversion).10
Example Default and Personalized Glide Paths
The three hypothetical individuals below illustrate key differences between default and personalized glide paths. Suppose that they have been auto enrolled into Advice by their plan sponsor. The table below shows the default settings selected for each, followed by the information that each person gave after personalizing their experience.
Automatic Enrollment
A sponsor can also enroll a participant automatically. In this situation, the participant is assigned a glide path based on plan default assumptions. They will remain in this default glide path until they personalize their investor profile. Once they personalize their profile, the participant will receive an updated investment plan and trades may be placed automatically to align the investor’s portfolio with the new plan. At that point, Advice’s suite of other services will also become available to the participant.

Auto-enrolling participants into Advice places them on better footing than if their savings were invested in a target-date fund. A 2023 analysis by Vanguard’s Enterprise Advice methodology team estimated that 86% of participants whose accounts were auto-enrolled into Advice received more utility than if their account balances had been invested in a target-date fund (fund and advisory fees considered).7

Although it offers a strong starting point, auto-enrollment in Advice does not provide as much utility as voluntary enrollments. This is because Advice does not yet have access to all the information that it needs to choose the best glide path for a given investor situation. Once the participant shares this information by updating their investor profile, they will receive the greatest utility.
  Default Nastasha Darron Morgan
Current Age Matches 30 43 56
Retirement Age 65 65 60 67
Time Horizon 100 100 95 85
Risk Aversion Moderate Conservative Moderately Aggressive Moderate
Loss Aversion None High None Low
Marital Status Single Single Married Married
Savings Rate Varies Low Normal Normal
Retirement Income Varies Medium Medium High
  • Natasha is relatively young, single, and more risk-averse. Since her retirement is decades away, she is uncertain about her retirement age and opts to stay with the age 65 default setting. She also chooses to save less toward retirement for now because she is focused on paying off her student loan debt.

  • Darron is middle-aged, married, entering his peak earning years, and a high saver. He is more comfortable with investment risk and wants to achieve higher returns so he can retire at age 60, ideally, and live until age 95.

  • Morgan, age 56 and married, is planning to retire at age 67. Her company offers a generous pension. She prefers to balance her risk and return. Ensuring retirement income until age 85 feels reasonable to her considering her personal and family health history.
Each person’s circumstances warrant adjustments to their glide paths. Figure 1 below illustrates this change. The dotted lines are the default glide paths that Natasha, Darron, and Morgan received when they were auto enrolled into Advice. The solid lines are the Personalized Glide Paths recommended to each of them after they personalized their investor profiles.
Line chart with title: Personalization Refines Glide Path Recommendations. The chart compares the percentage of stocks in a personalized Digital Advisor investment mix with the investor's age, 30 through 100 years. Dashed lines illustrate default glide paths. Solid lines illustrate personalized glide paths. There are 3 color-coded paths, labeled Natasha, Darron, and Morgan. The lines start between 80% and 100% and decline to a range between 30% and 65% at 100 years of age. Natasha (teal) owns the lowest amount of stock overall. Morgan (yellow) owns the second lowest. Darron (dark blue) owns the highest. Each glidepath corresponds to a scenario discussed in the article.
FIGURE 1
Personalization Refines Glide Path Recommendations
Natasha – The default glide path invested Natasha at 98% equity. However, her risk assessment determined that she has higher risk and loss aversion, suggesting a glide path with less equity risk. Therefore, her equity allocation was reduced 11 percentage points from 98% to 87% and will remain more conservative over time. The glide path’s lower expected portfolio volatility also implies lower expected returns, but it offers a more comfortable tradeoff to which she can stay committed. If needed, Advice will coach her to use other levers, such as adjusting her planned savings and retirement expenses to meet her goals.

Darron – Having a more aggressive risk attitude, Darron receives an increase in equity through his Personalized Glide Path. His current equity allocation increased 15 percentage points from 85% to 100% and remains more aggressive over time. This suits his attitude toward risk and supports his greater required returns if he is to retire at age 60.

Morgan – Morgan’s risk attitude differs little from the default glide path aside from a shorter time horizon and somewhat higher aversion to losses. Thus, her Personalized Glide Path is slightly more conservative, suggesting a modest reduction in equity compared to the default.

Each person’s PGP differs from their default. That change represents an adjustment, big or small, to provide more utility to the investor.

Value Beyond PGPs

Beyond PGPs, personalization allows Advice to understand investors’ needs and present other tools and features to help them reach their goals. Examples of these tools include planning for nonretirement goals and emergencies, paying off debt, creating a Social Security claiming strategy, and estimating health care costs in retirement. Participants can also further customize their investment plan through active investing and placing their Vanguard brokerage accounts and IRAs under Advice management.

Conclusion

When investing for retirement, it is crucial to select a strategic asset allocation and glide path that offers investors the best chance for investing success. Advice does this through Personalized Glide Paths. While auto-enrolled participants are placed on a good footing through their default glide path, the full value of PGPs is delivered through a participant’s engagement in the Advice experience. Not only does this generate more utility through refined investment plans, but it also opens the full suite of capabilities available to help investors reach their goals.
1Utility measures an investor’s satisfaction with a glide path’s risk and return.

2Behavioral finance is the study of psychological influences when investors make financial decisions.

3For more information on utility, see Aliaga-Diaz et al. Vanguard’s Life-Cycle Investing Model (VLCM): A General Portfolio Framework for Goals-Based Investing. Vanguard, March 2021.

4Marital status is inferred based on the investor’s tax filing status in the Advice experience.

5Advice permits up to 10% of the advised equity portfolio to be invested in a company stock fund.

6After their enrollment is completed, Advice will rebalance the investor’s portfolio. Their current investments will be exchanged, if needed, for new investments that fit the requirements of the recommended portfolio.

7Based on a random sampling of 50,000 participants. Certainty equivalents were compared between advised default glide paths and the Vanguard target-date glide path. Advised default glide paths must provide greater than 15 bps annualized, the approximate net cost of Vanguard Digital Advisor®, to provide more value than a target-date fund.

8For tax purposes, participants holding company stock funds are not eligible for conversion into Advice.

9When a plan sponsor completes the default election form, they choose the Planning Horizon, which is the duration for retirement. Planning Horizon is added to Retirement Age to determine Time Horizon.

10Retirement Age, Time Horizon, Risk Aversion, and Marital Status can be changed at any time. Concentrated Equity is chosen during the initial plan enrollment or personalization. The participant can update any of the default settings selected by the plan sponsor.

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Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.s.

Vanguard Digital Advisor’s services are provided solely by Vanguard Advisers, Inc. (VAI), a registered investment advisor. Please review the
Vanguard Digital Advisor brochure for important details about this service. Vanguard Digital Advisor’s financial planning tools provide projections and goal forecasts, which are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

The Vanguard Life-Cycle Investing Model (VLCM) is a proprietary model for glide-path construction that can assist in the creation of custom investment portfolios for retirement as well as nonretirement goals, such as saving for college. The main principle behind life-cycle investing and VLCM is to maximize the expected utility of consumption and wealth for people’s financial goals. The VLCM selects optimal glide paths for given risk tolerances, goals, and demographic characteristics by assessing the trade-offs, across someone’s life and/or time horizon, between taking investment risk to increase potential wealth and spending and the downside of increased uncertainty and volatility associated with more investment risk. Thousands of glide paths are compared, and the glide path with the highest utility score (the one that strikes the optimal balance between expected outcome and risk) is the best solution for the investor’s preferences, circumstances, and goal.



The VLCM utilizes the distributional forecasting framework of the Vanguard Capital Markets Model (VCMM) and uses asset return simulations to calculate consumption and wealth outcomes for any glide path across 10,000 future possible scenarios.



IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.



The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.



The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.