How Human Capital Should Dictate Asset Allocation

At the Defined Contribution Institutional Investment Association (DCIIA)’s Academic Forum held Thursday, speakers discussed the impact of age on savings and diversification in a session called “Human Capital: Impact on Retirement Savings.”

“Human capital refers to an individual’s skills and abilities over the course of their life,” said Dale Kintzel, senior financial economist, Ginnie Mae. One’s age should determine proper asset allocation, with younger people able to take more risk and having more flexible human capital, Kintzel says. This guides the approach to target-date and lifecycle funds, which scale back equity, or risk, exposure as a person nears retirement, he said.

“More and more people are following asset allocation advice,” Kintzel said, noting that assets in target-date funds (TDFs) have soared from $4.8 billion in 2000 to $942 billion in 2019.

He said that incorporating longevity annuities into a TDF or lifecycle account for those in retirement would not only guarantee them income but allow them to allocate a portion of their portfolio to riskier assets.

“The average person is not saving enough for retirement, and we estimate that three-quarters of Americans enrolled in defined contribution [DC] plans are not saving enough,” said Francisco Gomes, a professor of finance at the London School of Business.

Gomes said studies have explored whether a mandatory savings of 5% made a difference and found that it didn’t. A better alternative is to start people out at a 4.5% savings rate and to increase that by 0.25 percentage points each year up to a 15% cap, he noted.

Looking at the prospects for late Baby Boomers, those born between 1960 and 1964, and how macroeconomic shocks impact their retirement savings, Anqi Chen, assistant director of savings research at the Center for Retirement Research at Boston College (CRR), said the Great Recession decreased their wealth significantly, with many members of this group losing their jobs and not being able to find new employment.

“Today, half of U.S. households are at risk of not maintaining their standard of living in retirement,” she said. “Late Boomers were not behind earlier in their work cycle, but they were hit by the Great Recession.”

It is too early to tell how COVID-19 will impact Generation X, but Chen said she expects to see the same patterns emerge.