In December, the Employee Benefits Research Institute and Investment Company Institute published their annual updated survey and report, titled, "401(k) Plan Asset Allocation, Account Balances and Loan Activity."
Over time, the survey has shown how stable and unchanging the 401(k) market is. Despite strong stock and bond markets of recent years, the median account balance of 401(k) accounts has increased by only about $3,200 in 14 years – from $15,246 in 1999 to $18,433 in 2013.
Aggregate asset allocations and 401(k) loan activity levels have changed very little. Only about 10-11% of participants typically change asset allocations during a given year, and only 6-7% adjust contribution levels.
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But one big change has swept through the 401(k) market, and it is not for the good.
The percentage of young participants in their 20s who "do nothing" and thus are automatically enrolled in target-date mutual funds has soared. Here are a few pertinent facts from the most recent EBRI/ICI survey:
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Since 2006, the percentage of all participants in their 20s holding target-date funds has increased from 29.4% to 51.4%. Target-date funds now represent 35.0% of all 401(k) assets held by participants in their 20s, compared to just 15.3% for participants of all ages.
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65.2% of participants in their 20s have at least 80% of their plan balances allocated to equities. For 401(k) participants of all ages, just 43.9% have at least 80% in equities.
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Since 2007, the average equity exposure of participants in their 20s has increased from 48.3% to 65.2%. Over the same period, average equity exposure of all 401(k) participants has held steady at 43-44%. Participants in their 20s now have 28% more equity exposure than participants in their 50s.
What's wrong with this picture? Many participants in their 20s have never invested through a bear market. By failing to make active decisions about their plan's allocation, they have been auto-enrolled in target-date funds and thus are more heavily exposed to equities than seasoned investors. (For participants in their 20s, the glide paths of many target-date funds allocate 80-90% of assets to equities.)
The fallacy built into target-date funds has always been the idea that young people have the longest time horizon and can handle the most risk. But as many young people found out in 2008-09, a bear market can be a spirit-crushing way to begin retirement plan investing.
If you really want to help 401(k) plans in your market, offer to counsel groups of younger participants on options for making active asset allocation choices aligned with personal risk tolerance.
While you are at it, you also may be able to improve the dismal $18,433 median 401(k) plan balance, by encouraging younger people to contribute more to their plans than the automatic enrollment default percentage.
Use the latest EBRI/ICI survey results as ammunition to convince plan sponsors that young participants need professional counseling.
And click here to help sponsors evaluate whether they have the best target-date fund choice.
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