Target-Date Funds Have Normalized Workers’ Equity Allocations

Extreme and age-inappropriate allocations by workers to equities, of either 100% or nothing, have been solved by the Pension Protection Act of 2006 and TDFs, according to Vanguard paper.

The rise of target-date funds in retirement investing is making equity allocations by workers less extreme, new Vanguard Group research shows.

The rise of target-date funds—and automatic features, following passage of the 2006 Pension Protection Act—has boosted retirement plan participation rates, employee deferrals and account balances and influenced employees to sharpen age-appropriate investment allocations to equities, argues the research paper, “Generational changes in 401(k) behaviors,” from Vanguard.

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Workers have shifted from the extreme equity allocations—defined by Vanguard as entirely allocated to equity or holding zero equity—since 2006, says Dave Stinnett, a principal and head of strategic retirement consulting at Vanguard.

“In 2006, [extreme allocations] used to be a decent percentage of the population of 18-to-24-year-old’s,” Stinnett explains. “Over time, courtesy of the popularization of target-date funds, that’s really been solved for, and that was something that we spent a lot of time in the late 90s and 2000s talking to plan sponsors about.”

In 2021, among Generation Z employees ages 18 to 24 in automatic enrollment plans, 3% held portfolios with extreme allocations to equities, compared to 13% in 2006. In 2021, 8% of Baby Boomers ages 57 to 70 in automatic enrollment plans held extreme portfolios, compared to 36% in 2006, research showed.

Prior to the PPA passing, younger workers in particular “would start off start off [investing] way too conservative and then eventually, by their mid-30s, they would ramp up to where they should be [allocated], but they would miss out on 10 to 15 years of optimal equity allocation,” Stinnett says. “That’s really been solved for, the data shows, [because] If you’re defaulting people into the plan and defaulting them into target-date funds, they’re starting off where they need to be, and then they’re having that [investment risk] decline as they get older, [in a glidepath] out of equities.”

Target-date funds have become the prevalent qualified default investment alternative for defined contribution plan participants following PPA’s passage.

“That’s [driving] the bulk of it,” Stinnett says. “It proves out that defaults and automatic features work, and they work dramatically, or the most [effectively] for the youngest age cohorts.”

The shifts for workers away from extreme equity allocations are a clear result, Stinnett says

“It’s something I expected to see, but not to the degree to which you see it’s been cured,” Stinnett adds.

In 2006, regardless of workers’ age, median equity allocations for every age cohort examined were significantly similar, data showed, despite younger workers having more years to prepare for retirement.

In 2006, median participant-weighted equity allocations have shifted for the age cohorts of Generation Z (18 to 24); Millennials (25 to 40); and Gen X (41 to 56), Vanguard found.

The oldest cohort, Baby Boomers (57 to 70), held a 70% equity allocation in 2006, and the “spread between the youngest and oldest cohorts was only 11 percentage points,” the paper stated. “In 2021, the difference in the equity allocation held by each generation was much sharper.”

In 2021, Generation Z and Millennials had a median equity allocation of 89%, compared with 61% to 65% for the boomers—based on whether participants were subject to automatic enrollment—a 24%-to-28% spread, Vanguard data showed.

The research paper was authored by Jeff Clark, a senior product owner, and Kevin Kukulka, a data analyst, at Vanguard.  

Data sources for the paper included 219 defined contribution plans representing 250,000 employees offered by the same set of companies in both 2006 and 2021, according to a spokesperson. The methodology compared cohorts based on their ages in 2006 and 2021.

PBGC Provides More Than $400 Million in Supplemental Funding to New York Teamsters

The NYS Teamsters Conference Plan has now received approximately $1.4 billion in total. The PBGC also provided supplemental relief to three other plans.

Last week, the Pension Benefit Guaranty Corporation provided supplemental assistance to four struggling pension plans through the Special Financial Assistance Program.

On Thursday, the PBGC provided a supplemental $438 million to the Syracuse, New York-based New York State Teamsters Conference Plan. In November 2022, the plan had been given $963.4 million. The plan covers 33,643 participants and became insolvent in October 2017, when it had to cut benefits by approximately 20%.

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On Friday, the PBGC provided supplemental assistance to three smaller plans.

The first was the Teamsters Local 52 Plan, based in Valley View, Ohio, which covers 769 participants. The plan received $12.5 million on top of the $84.9 million it received in November 2022. The plan was projected to become insolvent this year. Senator Sherrod Brown, D-Ohio, who initially sponsored the legislation that became the SFA Program, said in a press release that the plan would have faced cuts of between 50% and 60% absent a bailout.

The PBGC also provided $16,800 to the Cement Masons Local 783 Pension Plan, based in Houston with 51 participants. The plan had previously received $4.5 million in April 2022 and had been insolvent since November 2016, when it cut benefits by 20%.

Lastly, the PBGC gave $47,100 to Cement Masons Local 681 Pension Plan, another cement workers’ plan from Houston, with 196 participants. The plan had previously received $16.1 million in April 2022. The plan became insolvent in August 2016, when it cut benefits by 15%.

The Special Financial Assistance provision of the American Rescue Plan Act allows for PBGC funding for severely underfunded multiemployer pension plans. Funds that receive assistance must monitor the interest resulting from the grant money as separate from other sources of funding. The PBGC requires that at least two-thirds of the money it provides be invested in “high-quality fixed income investments.”

The Final Rule on SFA, issued in July 2022, states that the other third can be invested in “return-seeking investments,” such as stocks and stock funds. The Final Rule also modified the formula for calculating assistance payments. Plans which applied under the interim rule can reapply for the assistance they would have received under the Final Rule.

 

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