401(k) Allocations Have Changed

When examining the past 20 years of the Alight Solutions 401(k) Index—formerly the Aon Hewitt 401(k) Index—two major trends emerge: 401(k) portfolio allocations have changed dramatically, and trading activity has steadily declined, except when market corrections occur, according to an analysis by Alight Solutions.

The analysis found 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 how much money flows to that investment. Some have removed company stock as an investment option while others have placed limits on how much may be invested in it. 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 is clearly automatic enrollment. Since the Pension Protection Act of 2006 (PPA) greenlighted that plan feature’s way, employers have steadily been adopting it. Moreover, the PPA explicitly permitted TDFs to be used as a default investment fund.

From 1997 through this year, asset allocations in large cap U.S. equity funds have remained relatively stable. But allocations to stable value funds dropped from 23% to 11%. This also can be attributed to the PPA and subsequent regulations concerning qualified default investment alternatives (QDIAs).

Participant trading in 401(k) plans has slowed over this same 20 years, but, Alight notes, the rise of TDFs is not the sole reason for the trading slowdown. While roughly 70% of investors use TDFs, about half of them have another investment in their 401(k) portfolio. In addition, the workers who are exclusively invested in a TDF have an average plan balance much lower than that of workers with a TDF plus other investments. “This means the fraction of balances in the 401(k) Index that are attributable to investors with only TDFs is fairly small and, therefore, would not be the primary reason for the decrease in trading,” Alight says.