Plan Assets Moving Away from Fixed Income

April 9, 2014 (PLANSPONSOR.com) – Defined contribution (DC) plan participants reduced their holdings in fixed income and increased allocations to U.S. small-cap and mid-cap equities in 2013, while target-date funds continued to increase as a top asset class, says a recent analysis.

According to the second annual edition of Northern Trust’s Defined Contribution Tracker, target-date funds (TDFs) drew 14.6% of asset flows into retirement plans as tracked by the firm in 2013, the strongest flows of any investment category. It was the second year of strong flows into TDFs, which made up 15.7% of all assets in the Northern Trust universe of DC plans, the second-largest share of any category.

“Target-date funds have dominated asset flows in our Defined Contribution Tracker, benefiting from their status as the preferred qualified default investment (QDIA) in most DC plans,” says Jim Danaher, managing director of defined contribution solutions at Northern Trust, based in Chicago. “With the increased adoption of automatic enrollment and other automated features, we anticipate that target-date funds will continue to experience strong growth, eventually accounting for the majority of DC assets.”

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Northern Trust’s Defined Contribution Tracker analyzes data from a universe of nearly 100 retirement plans in the United States, representing more than 1.7 million participants and $225 billion in assets with daily valuation serviced by Northern Trust.

Along with a trend toward TDFs, the tracker shows that many participants continue to shift between asset classes from year to year. Fixed income saw outflows of nearly 11% in 2013, for example, after the category had inflows of 9.2% in 2012. U.S. mid cap and small cap drew 6.3% and 4.4%, respectively, in new flows in 2013 after losing assets the previous year.

The tracker also noted the following:

  • International equities drew 9.3% net flows in 2013, a second consecutive year of inflows. Yet participant portfolios continue to exhibit a home country bias, with an 82% to 18% split between U.S. and non-U.S. equities compared with the approximately 50% to 50% breakdown within major world equity indexes.
  • Within the U.S., participants demonstrate a bias toward small- and mid-cap equities with strong flows to those asset classes and minimal (0.8%) inflows into large-cap stocks. U.S. large-cap equities still represent the largest asset class held by participants, with 24.4% of assets, but participant portfolios are actually underweight for large caps relative to the market capitalization weights of U.S. equities.
  • With significant outflows in 2012 and 2013, company stock decreased at the fastest rate of all categories, as plan sponsors look at ways to effectively reduce the concentrated positions in individual securities that exist in participant accounts.
  • A closer look at target date funds reveals that plan sponsors are favoring solutions that utilize passive or index funds, with 58% implementing all passive and another 25% using a blend of active and passive funds.

“The Defined Contribution Tracker provides a glimpse into how participants are investing and can yield insights into investor behavior when matched up with market events,” says David W. Fox Jr., head of corporate and institutional services in the Americas for Northern Trust. “More importantly, this tool demonstrates how plan sponsor actions, such as adding pre-mixed options like target-date funds and focusing on company stock, can help participants construct more diversified portfolios as they invest for retirement.”

Northern Trust Corporation is a provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. More information can be found here.

Affluent Millennials Prefer Online Brokerage Accounts

April 9, 2014 (PLANSPONSOR.com) – The young and affluent members of Generation Y (a.k.a., Millennials) show a higher use of online brokerage accounts over defined contribution (DC) plans, says a new study.

The study by Hearts & Wallets LLC, “New Insights into the Finances of Generation Y,” finds that Gen Y’s investment preferences center around a desire for financial independence over a traditional leisure retirement, making retirement savings accounts less appealing. In fact, the study shows that 74% of affluent members of Gen Y have assets in an online brokerage account, compared with 67% who have assets in a defined contribution (DC) plan.

In addition, the study results show that affluent Gen Y members (i.e., those with more than $100,000 in household assets) are alone among working age segments in being more likely to invest assets in an online brokerage account than a DC plan. The penalty-free access to capital and far greater investment choices typically associated with online brokerage accounts attract Gen Y workers, who appear to remain fearful of long-term commitment.

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“Gen Y desires financial independence rather than retirement,” says Chris J. Brown, principal, Hearts & Wallets, based in Hingham, Massachusetts. “Gen Y could become more engaged with DC plans if the financial services industry promoted more qualified plan benefits beyond saving for retirement, like tax deferral. Since many Gen Yers don’t yet own homes and thus don’t qualify for the mortgage interest deduction, perks like tax deferral or applicable ‘free money’ from an employer match can be very appealing.”

The study also finds that about three in four Gen Y workers aren’t planning for traditional retirement or the prospect of stopping work all together. Instead, Gen Y is focusing on short-term goals such as vacations and emergency funds. At the same time, the long-term goal is to avoid depending on any single employer for their livelihoods. In terms of goals, 42% of Gen Y wants to have enough money to work less and spend their time as they want when they get older.

Even though saving through tax-deferred accounts could help achieve this goal, the study finds that the current positioning of such options as retirement solutions leads Gen Y to favor taxable brokerage and bank accounts. With 70% of assets held in cash, Gen Y is the most conservative generation in its investment allocations, even though conventional theory suggests this age group should aggressively seek higher yields.

The study also shows that Gen Y is seeking answers on questions about financial prioritization, since many are undergoing life changes. Fifty-nine percent have experienced a recent life event, most commonly a move or job change. Carrying little debt and tending to save, Gen Y exhibits many fiscally responsible behaviors. Yet, some actions and attitudes limit Gen Y’s ability to build assets:

  • Less than one-quarter of Gen Y owns U.S. stock mutual funds compared to a third of Generation X and Baby Boomers;
  • Only 30% of Gen Y assets are allocated to employer-sponsored retirement plans or individual retirement accounts (IRAs), compared with 48% of Gen X assets;
  • Only one-third of Gen Y directs 50% or more of their savings to employer-sponsored retirement plans, compared with nearly two in five Gen Xers;
  • Gen Y has about 40% of their assets in bank checking or savings accounts; and
  • Gen Y may not fully understand the consequences of cashing out their balance in an employer-sponsored retirement plan, since half of Gen Yers are cashing out rather than rolling over their balance into a new plan.

“The challenge for Gen Y is many are not focused on how they save,” says Laura Varas, principal, Hearts & Wallets. “Often they invest too conservatively to accrue sufficient resources for later in life. To connect, providers and advisers need to talk about financial independence and short-term goals since many Gen Yers aren’t specifically working toward a goal of retirement.”

Affluent members of Gen Y also want delivery of professional financial advice through a combination of technology and in-person meetings with financial professionals, according to the study. Varas says these recent findings support those arrived at by an earlier Heart & Wallets study, “Generations X & Y Won’t Be DIY Forever,” which concluded that younger investors use financial applications and websites to complement, not substitute for, advice from a financial professional.

The recent “New Insights” study confirms that Gen Y has little interest in services that rely solely on financial professionals, with 45% of Gen Yers preferring to use financial professionals in tandem with technology. Some favorite Gen Y financial information and advice technology uses are:

  • Visiting finance portals for information, such as Yahoo Finance or others (29%), compared with 22% of Boomers;
  • Using planning tools or calculators (35%);
  • Using social media (Twitter, Facebook, LinkedIn) to get information about finance and investing (27%);
  • Checking their accounts using computers or mobile devices (42%); and
  • Usage of mobile devices for many tasks is increasing year over year. For example, in 2013, 19% of Gen Y-ers checked their accounts using mobile devices.

The study is part Hearts & Wallets’ Insight Module series and is based on review of more than 5,000 American households. Hearts & Wallets LLC is financial research firm that focuses on understanding the savings and investment needs and behaviors of American households.

More information can be requested here.

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