May 19, 2011

What Do Young DC Plan Participants Favor? Vanguard Tells All

Vanguard survey finds target-date funds, auto-enrollment contributed to higher allocations to equities among all ages

The recession hasn't dented young investors' use of equities, it seems. A report released Thursday by Vanguard found the average equity allocation of defined-contribution plan participants in their 20s rose to 84.7% in 2010 from a low of 40.7% in 2003.

Young investors' apparent predilection to equities was "more profound" among the youngest investors, Vanguard found, but was shared by investors younger than 30.

John Ameriks, co-author of the report, said in a statement that the financial crisis has not led to a "lost generation" of investors in 401(k) plans and other defined-contribution plans. "In fact, we found that many younger people hold balanced investments in their plans that include a healthy portion of stocks,” he said.

At play in young investors' high equity allocations, according to the report, is automatic enrollment in retirement plans and the shift away from conservative defaults to more balanced options like target-date funds. These factors affect young participants more than their older counterparts because many employers offer automatic enrollment for new hires only.

While target-date funds have helped lead to heavy equity allocations among the youngest investors, they've "significantly altered" asset allocations among investors of all ages. Among plan participants younger than 35, those with target-date funds held an average 8.5 percentage points more in equities than those who didn't own target-date funds, and participants between 36 and 54 held 7.9 percentage points more.

"Younger participants are now more likely to be invested in a balanced portfolio offering a better diversified mix of stock and bond investments, regardless of current market conditions,” report co-author Steve Utkus, said in a statement.

Older participants who haven't had the advantages of auto-enrollment and target-date funds, could benefit from re-enrollment strategies that move assets into balanced funds and require participants to opt-out of the transfer if they choose to, Vanguard found.

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