New Plan Design Trends Improved Participant Allocations

In a significant number of American households, defined contribution (DC) retirement plan participants’ investment allocations occupy the extremes, finds an analysis from Towers Watson.

About 15% of investors shy away from equities entirely, while roughly 22% invest everything in equities. In “Asset Allocations: How American Workers Are Investing Their Retirement Savings,” Tusheng Huang and Gaobo Pang note that avoiding equity entirely forgoes opportunities for higher returns, and investing everything in equities poses the risk of major losses.

However, according to the analysis, the extent of extreme investing declined from 2004 to 2013, suggesting that households are better diversifying their retirement portfolios. Qualified default investment alternatives (QDIAs) presumably have attracted more workers into the equity market, the authors say.

The analysis shows equity exposure declines as workers age. Equity market participation (non-zero in equity) is highest among investors in their 30s through 50s. Roughly 37% of 25- to 34-year-old investors hold 75% or more of their savings in equities, compared with about 26% of 65- to 74-year-olds. This link between risk reduction and age is basically consistent with life-cycle financial advice, the report notes.

In addition, target-date funds (TDFs), which have become an increasingly popular DC plan QDIA in recent years, start out with greater equity holdings and then automatically reduce equity allocations as participants near retirement. Among age 55 to 64 households, the median equity allocation was around 50% from 2004 through 2013. This falls in the middle of the TDF glide paths established by major fund providers, the report says.

According to the analysis, the equity share of DC accounts is generally larger when participants are aware of investment options and are able to choose their own investments. Nearly 33% of households with no control over their investment selections have no equity investments. Plans that do not allow participants to choose their investments may be more likely to maintain conservative asset portfolios, the report says.

This analysis examines the salient patterns of workers’ asset allocations in retirement accounts using the Survey of Consumer Finances (SCF, 2004, 2007, 2010 and 2013 waves). It combines all DC-type accounts from current and prior jobs for each household and calculates the value-weighted percentage invested in equity. Individual retirement accounts (IRAs) are disregarded. The report is here.