Investing August 3, 2017

How Two Generations of 20-Somethings Invest Differently for Retirement

401(k) investors in their 20s are investing much less in company stock than their counterparts did in 1996 and plenty more in balanced funds, a joint study by the ICI and EBRI finds.

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Allocations to equity vehicles within their 401(k) accounts differ significantly for 20-something Millennials today as opposed to that of their Generation X counterparts when they were in their 20s, according to a long-term study by the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI).

Although the study found that the twenty-something investors at year-end 1996 and those at year-end 2015 had allocated a similar portion of their aggregate assets to overall equities, the mix of vehicles invested in differed significantly. For example, savers in their twenties at the end of 2015 allocated 28% of their aggregate assets to equity funds at year-end 2015. Back in 1996, participants in their twenties allocated 55% to such funds. Furthermore, today’s twenty-somethings are relying less on company stock (5%) than their 1996 counterparts (17%).  

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Today’s younger 401(k) participants are investing more heavily in balanced funds, including target-date funds (TDFs). At the end of 2015, participants in their twenties had invested 54% of their assets in balanced funds with much of their assets being driven to TDFs (47%). In 1996, participants in their twenties allocated only 8% of their 401(k) plan assets to balanced funds. However, TDFs were not reported separately in the database before 2006.

“One factor influencing this trend is that today’s younger investors are relying more on the automatic rebalancing feature of target-date funds to keep their assets allocated in an age-appropriate way as they progress through their careers,” says Sarah Holden, ICI’s senior director of retirement and investor research.

Overall equity allocations did not stretch too far apart, however. Participants in their twenties at year-end 2015 had allocated 80% of aggregated assets toward equities. Savers in their twenties at year-end 1996 had allocated 77% toward equities.

The EBRI and ICI find that TDFs in particular continue to gain popularity among all ages, particularly among new hires. The firms’ database shows that investments in TDFs increased in 2015 to 20% of assets, up from 5% at year-end 2006. At year-end 2015, 60% of recently hired participants held TDFs, and these funds accounted for more than one-third of their assets.

“The extensive and unique EBRI/ICI database continues to be extremely valuable, permitting in-depth examination of 401(k) plan participants’ activities,” says Jack VanDerhei, EBRI’s director of research. “Today’s update reveals that 401(k) participants in their twenties are diversifying their 401(k) investments in what many perceive to be an age-appropriate manner. In 2015, only 7% of these young participants had no equity allocation in their 401(k) plans. Moreover, 75% of this group had at least 80% of their 401(k) balances invested in equities in 2015, due in large part to the increased utilization of target-date funds.”

These findings come from a study based on the EBRI/ICI database of employer-sponsored 401(k) plans compiled through a collaborative research project undertaken by the two organizations since 1996. At year-end 2015, the EBRI/ICI database included statistical information on 26.1 million 401(k) plan participants in 101,625 employer-sponsored 401(k) plans, which held $1.9 trillion in assets.

Full results of the annual EBRI/ICI 401(k) database update are posted here on EBRI’s website and here on ICI’s website.

Compliance August 3, 2017

Regulators Have Big Agendas Still for 2017

On the IRS’ list are rules and guidance for which it still plans to issue a Notice of Proposed Rulemaking (NPRM).
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The Office of Management and Budget (OMB) issued the Trump Administration’s Unified Agenda of Regulatory and Deregulatory Actions, which provides an updated report on the actions administrative agencies plan to issue in the near and long term.

Among rules the Internal Revenue Service (IRS) lists as planning to issue in 2017 are those regarding the definition of governmental plan and rules related to retirement plans of Indian Tribal Governments. An Advanced Notice of Proposed Rulemaking (ANPRM) was issued for both of these rules in 2011, and while the IRS held a comment period and public hearings, nothing has been issued since then.                     

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Also on the IRS’ list are rules and guidance for which it still plans to issue a Notice of Proposed Rulemaking (NPRM). The agency says it plans in 2017 to issue additional guidance regarding the determination of plan assets and benefit liabilities for purposes of the funding requirements that apply to single employer defined benefit (DB) plans, the use of certain funding balances maintained for those plans, and the benefit restrictions for certain underfunded DB plans.

In addition, the IRS plans to issue proposed regulations that would provide guidance on the requirement for plan administrators or employers to furnish an individual statement to participants who separate from service with a deferred vested benefit, as well as proposed regulations that would provide an update to existing final vesting regulations that generally apply to tax qualified retirement plans under section 411(a) of the Internal Revenue Code and 29 U.S.C. 1053 and 1054.

The IRS’ regulatory agenda for 2017 also lists a NPRM for requirements for employee stock ownership plans (ESOPs). And, no doubt, the agency is awaiting action in Congress for proposed regulations on the excise tax on high cost employer-sponsored health coverage under section 4980(I), enacted by the Affordable Care Act.

NEXT: DOL and PBGC agendas

As for the Department of Labor’s (DOL)'s regulatory agenda for 2017, it lists its Request for Information (RFI) on Fiduciary Rule and Prohibited Transaction Exemptions. The RFI has been issued and the first comment period about delaying the implementation of the rule has ended. The second comment period seeking information regarding potential new and amended administrative class exemptions from the prohibited transaction provisions of the Employee Retirement Income Security Act (ERISA) will end soon.

The DOL also has slated for this month an interim final rule about an amendment to its Abandoned Plan Program. The agency issued an NPRM in 2012 examining whether, and how, to amend those regulations by expanding the scope of individuals entitled to be a "qualified termination administrator" (QTA). Under the Termination of Abandoned Individual Account Plans regulations, only a QTA is authorized to determine whether an individual account plan is abandoned, and to carry out related activities necessary to the termination and winding up of the plan's affairs.

The list also shows the DOL plans to issue an interim final rule amending and restating its Voluntary Fiduciary Correction Program (VFCP) under ERISA.

The Pension Benefit Guaranty Corporation’s (PBGC)'s regulatory agenda for 2017 lists, among other things:

  • Valuation Assumptions and Methods: Interest and Mortality Assumptions for Asset Allocation in Single-Employer Plans and Mass Withdrawal Liability Determination in Multiemployer Plans;
  • Methods for Computing Withdrawal Liability;
  • Terminated and Insolvent Multiemployer Plans and Duties of Plan Sponsors;
  • PBGC-Approved Arbitration Procedures—Multiemployer Plans;
  • Mergers and Transfers Between Multiemployer Plans; and
  • Missing Participants.

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