TDFs Have Improved Participant Diversification

Jeff Kletti, head of investments at Wells Fargo Institutional Retirement and Trust, sat down recently with PLANSPONSOR to offer an inside look at trends and challenges taking shape within the company’s sizable defined contribution (DC) plan book of business.

Among various topics, the conversation focused in large part on plan sponsors’ embrace of passive target-date funds (TDFs), and how this trend includes some important points of subtlety that go beyond “active versus passive.” Kletti also took time to highlight the way retirement plan participants have, tied to the popularity of automatic enrollment into target-date funds, significantly improved the diversification of their retirement accounts.

“Over the last five years, the number of participants invested in a diversified portfolio has continued to increase,” he explained. “More than 82% of those from the Millennial generation, born between 1977 and 1993, are now invested in a diversified portfolio. This is a tremendous development from the perspective of ensuring retirement investors carry an appropriate amount of risk.”

For some investors, Kletti said, the use of a TDF results in more risk being taken than otherwise would have been the case—for example, in the situation where a Millennial investor moves from favoring stable value or money market investments to accessing a balanced portfolio of U.S. and international equities within a TDF. Others actually see their risk-taking dialed back when they either choose or are swept into a TDF, say in the case of a late-career Baby Boomer moving out of heavily concentrated positions in employer stock or a small segment of the U.S. stock market.

According to the data provided by Wells Fargo, the Baby Boomer generation, born between 1946 and 1964, is lagging their Millennial counterparts when it comes to risk-optimized investing, with 76.8% invested in a well-diversified portfolio.

“About a third of participants across Millennials, Generation X (1965-1976), and Baby Boomers who self-manage the investment of their plan accounts are more conservative than a typical target-date fund appropriate to their age,” Kletti observed. “At the same time, over 50% of Boomers have greater equity exposure than an age-appropriate target-date fund, which could expose them to significant investment risk.”

The data further shows 11% of Millennials and 42% from Generation X are invested more aggressively than an age appropriate target date option.