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Big Jump in 401(k) Investors Seeking Diversification

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One-third of 401(k) plan participants invested their entire account balance in a professionally managed asset allocation and investment option in 2011, up from less than one-tenth in 2005, according to a recent report issued by Vanguard.

The report, which examines the saving habits of 3 million investors with Vanguard 401(k) plans, found the growth in so-called professionally managed allocations—in a single target-date or balanced fund or through a managed account advisory service—to be one of the most important trends in retirement plans today, reflecting a desire of many investors to improve their portfolio diversification and reduce risk.

Of the 33% of investors using a professionally managed allocation program, 24% employed a single target-date fund (TDF), 6% a single traditional balanced fund and 3% a managed account advisory program. In 2011, 18% of participants had an extreme position in equities, holding either 100% in equities (10% of participants) or no equities (8%), vs. 34% of participants with 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, chief author of the “How America Saves” report, in a statement. “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 defined contribution plans.”

According to Vanguard, the soaring adoption of TDFs is fueling this growth: 82% of plan sponsors offered such funds in 2011, up from 28% in 2005. Today, 47% percent of all 401(k) participants use TDFs. Target-date funds are often designated as the investment default in automatic enrollment plans, but in plans with voluntary enrollment, 48% of participants invest in TDFs.

The fund giant believes the rising TDF popularity will continue to influence the adoption of professionally managed allocations. “Largely because of the growing use of target-date options, we anticipate that 55% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed allocation by 2016,” Young said.

“It’s important to keep in mind that typical participants are in their mid-40s and saving 10%, with about eight years of tenure with their current employer, and 20 to 25 more years to grow their account,” said Steve Utkus, head of Vanguard’s Center for Retirement Research and co-author of the report, in a statement. “Furthermore, their retirement plan assets will likely be complemented by Social Security benefits and other savings, including assets in other employer plans, a spouse’s plan, or personal savings accounts.”

Other key trends outlined in the 401(k) report include:

The 2011 plan participation rate was 76%, unchanged from 2010, though automatic-plan enrollment continues to rise. In 2011, 29% of Vanguard plans had adopted automatic enrollment, up two percentage points from 2010.

Employees in plans with an automatic enrollment feature at the end of 2011 had an overall participation rate of 80% compared with a participation rate of only 60% for employees in voluntary enrollment plans.

Seven in 10 automatic enrollment plans have implemented automatic annual deferral rate increases, up from three in 10 in 2005. Automatic enrollment improves participation rates among traditional non-savers: young, short-tenure and lower income workers.

The average participant deferral rate improved to 7.1% and the median was unchanged at 6%. The aggregate average plan savings rate—including both participant and employer contributions—was 10.4% in 2011. Vanguard’s view is that investors should save 12% to 15% or more.


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