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.