Retirement saving: Save more or
take more risk?

BlackRock |Jan 7, 2019

Among the challenges faced by plan sponsors is the need to help participants manage the two most critical investment inputs: building an appropriate asset allocation and ensuring
sufficient savings.

As defined contribution ("DC") plans have evolved, tools have emerged to help. Target date funds increasingly address the challenge of setting an age-appropriate asset allocation through a detailed analysis of labor income, long term economic forecasts and other factors. Less technical but perhaps equally significant are the plan design tools developed to encourage savings through auto-enrollment, employer match and auto-escalation. In our experience, however, these solutions—target date funds and plan design—are seldom considered jointly.

We believe this is a missed opportunity. Modeling participant income, savings and spending behaviors can allow us to more precisely match optimal savings rates with risk in the target date fund glidepath.

For instance, a 45 year old participant wants to maximize her retirement savings over the last twenty years of her career. It may be natural to assume that the path to a more robust retirement outcome is through more aggressive investments. The accompanying illustration may therefore come as a surprise. We assume that she is on track to accumulating a retirement balance of just under $390,000 at age 65. She has a choice: increase her expected return—and her risk—by increasing her equity allocation by 10%, or maintain her current portfolio but increase her salary contribution by 1%. The graphs below compare the projected outcomes.

Take more risk or increase savings?

Take more risk or increase savings


Started contributions age 20
Salary at age 45 $57,0001
Default Portfolio Mix 60% MSCI USA Index /
40% Bloomberg Barclays US Aggregate Bond Index
Default total contribution amount (employer + employee) 6%

For illustration only. Please see the Appendix for more information about the inputs used and for the tool’s assumptions and methodology. These results do not reflect actual investment returns that any investor received. Scenarios are hypothetical and based on a portfolio of indices. See the appendix for more detail.
1 U.S. Census Bureau, Current Population Survey, 2016 Annual Social and Economic Supplement (

This is a potentially empowering realization for participants: a relatively modest increase in contributions resulted in more than three times the improvement in the final balance than did increasing risk. With this example in mind, here are some considerations for optimizing plan design for contribution levels that can be adopted for specific plan needs:


The auto default percentage should be set high enough to get new hires off to a good start, but not high enough to discourage participation. The right range will depend on the participation population.


Determine an auto-escalation path that works with a firm's income pattern tracking wage growth as spending power increases.


Leave auto escalation uncapped (allowing participants to end the annual increases at a time of their choosing) or set high cap, say, 15 or 20%, so to take advantage of mid to late career earnings peaks.

Deeper, more sophisticated analysis, risk analytics and BlackRock proprietary tools can help plan sponsors project the range of outcomes in their current plan and measure the impact of plan design adjustments. By unpacking the assumptions built into the target date fund, we may be able to identify the range of contributions needed to create specific outcomes and even understand how the target date fund may function as a decumulation vehicle. BlackRock can work with plan sponsors and consultants to bring the target date fund and plan design into optimal alignment.

To learn more about the relationship between target date funds and plan design, download the full paper.

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Appendix: Input values—saving more vs taking more risk
Inputs for the sample participant

 Base caseChange scenario 1*Change
scenario 2*
Current age 45    
Current salary1 $57,0001    
Contributing since age 20    
Expected retirement age 65    
Default contribution rate 3% 4%  
Company match
Company match (%)
Match (cents per dollar)
Max match (on pay) ($)

Auto-escalation (increments) (%)
Auto-escalation cap (%)

Non-elective contribution (% match of comp) 0%    
Catch up contributions No    
Current allocation 60% US Large-Cap Equities
40% US Bonds
  70% US Large-Cap Equities
30% US Bonds
Fees 0%    

* The changes from the Base Case to Scenario 1 and Scenario 2 are applied starting at age 45 until retirement at age 65.
1 U.S. Census Bureau, Current Population Survey, 2016 Annual Social and Economic Supplement (