Forget doing it yourself. One-third of all Vanguard 401(k) plan participants invested their entire account balance in a professionally managed asset allocation and investment option in 2011, according to Vanguard’s How America Saves 2012, an annual report on how U.S. workers are saving and investing for retirement.
The report notes that “the increasing prominence of so-called professionally managed allocations—in a single target-date or balanced fund or through a managed account advisory service—is one of the most important trends in 401(k) and other defined contribution (DC) plans today.”
In 2011, 33% of all Vanguard participants were invested a professionally managed allocation program: 24% in a single target-date fund (TDF); 6% in a single traditional balanced fund, and 3% in a managed account advisory program. The total number is up from 9% at the end of 2005.
These options dramatically improve portfolio diversification for many participants, the company claims, helping to reduce the risks associated with either having too much in equities (which could expose a participant to considerable market volatility) or too little (reducing the long-term return potential of a retirement portfolio). For instance, the report notes in 2011, a total 18% of participants took an extreme position in equities, holding either 100% in equities (10% of participants) or no equities (8%). In contrast, a total of 34% of participants held extreme equity positions in 2005.
“Some question the benefits of 401(k) plans because they transfer investment decision-making to generally inexperienced participants,” said Jean Young, lead author of How America Saves. “Now, however, an increasing number of participants can leave the asset allocation, investment selection and ongoing management responsibilities of their account to the professionally managed allocation options available in their DC plans.”