401(k) Portfolio Allocations Changed Dramatically Over 20 Years

In addition, Alight Solutions finds participant trading in 401(k) plans has slowed down from 1997 to 2017.

By Rebecca Moore | September 05, 2017
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Looking over 20 years of the Alight Solutions 401(k) Index (formerly the Aon Hewitt 401(k) Index), two major trends have emerged—401(k) portfolio allocations have changed dramatically, and trading activity has steadily decreased except when market corrections occur, according to an analysis by Alight Solutions.

The analysis finds that in 1997, the asset class with the greatest amount of participant balances was company stock (29%). However, since that time, employers have made changes to curb the amount that flows to company stock. Some have removed company stock as an investment option while others have placed limits on the amount that can be invested in the stock. Nearly all of the companies that match in company stock allow workers to immediately transfer the money to another asset class. As a result of these changes, company stock now comprises less than 10% of 401(k) balances in the 401(k) Index.

On the other hand, in 1997, only 1% of 401(k) assets were in premixed portfolios. Now, target-date funds (TDFs) are the largest asset class in the Index (25%). The reason for this growth can clearly be pinned on automatic enrollment. Since the Pension Protection Act of 2006 (PPA) greenlighted the way for automatic enrollment, employers have steadily been adopting the feature. Moreover, the PPA explicitly paved the way for TDFs to be the default investment fund.

From 1997 to 2017, asset allocations in Large Cap U.S. Equity funds has remained relatively stable. But, allocations to Stable Value funds went from 23% to 11%. This also can be attributed to the PPA and subsequent regulations about qualified default investment alternatives (QDIAs).

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