Data & Research May 19, 2011

Recession Increased Retirement Delays

Research from The Conference Board reveals that the 2008-2009 economic recession has increased pressure on individuals to delay retirement.
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Using data from its Consumer Confidence Survey, The Conference Board found 33% of households that didn’t suffer from asset or labor loss caused by the recession said at least one member of their household will delay retirement, compared to 44% who suffered an asset loss and 55% who suffered a labor loss. Nearly seven out of ten respondents (68%) reporting both an asset and labor loss during the recession indicated they or a member of their household is planning to delay retirement.  

According to the research, the health industry experienced the largest decline in retirement rates post-recession. In 2009-2010, only 1.6% of full-time workers aged 55-64 retired within 12 months, compared with almost 4% in 2004-2007.    

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The construction industry also experienced a large decline in retirement rates. This is likely the result of a long slump in the industry, which resulted in many laid-off workers trying to stay in the labor force to make up for lost income.    

There was essentially no retirement delay among government workers. The Conference Board said that is expected, since these workers are more likely to receive defined benefits, making them more insulated from the decline in financial asset values in their pensions.  
Data & Research May 19, 2011

Younger Employees Have Well-Balanced Portfolios

Research from Vanguard shows that defined contribution plan participants younger than 30 have higher equity allocations than other generations had at the same age.
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The study, “Generations: Key Drivers of Investor Behavior,” shows that from a low point of 40.7% in 2003, the average equity allocation of the youngest participants (age 20) in defined contribution (DC) plans administered at Vanguard rose to 84.7% in 2010, an increase of nearly 45 percentage points. This pattern was more profound for that youngest group but held in general for participants younger than 30.   

The study found that equity allocations of older participants (age 55 and over) have declined slightly over the past several years.  

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“The ‘lost decade’ and financial crisis did not lead to a ‘lost generation’ of investors in 401(k) and other DC plans. In fact, we found that many younger people hold balanced investments in their plans that include a healthy portion of stocks,” said John Ameriks, co-author of the report, in a press release.  

Vanguard researchers attributed the study’s findings to the growing use of automatic enrollment programs and the widespread shift from conservative default investments toward balanced options, such as target-date funds (TDFs), in many plans. More participants in voluntary enrollment plans, particularly those joining in recent years, are choosing to invest in TDFs because of their simplified approach to investing.

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Growth of TDFs Altering Asset Allocations  

Plan designs that include auto-enrollment and TDFs have eclipsed other factors that can influence portfolio choices and stock market investing, including the market’s past performance and prevailing market events, age, experience, and participant inertia, the Vanguard research found. Participants generally under 30 are the main beneficiaries, because most plan sponsors have implemented automatic enrollment and the use of TDFs as default funds for newly hired employees only, a group that tends to include more young individuals than older people.   

The growth of TDFs has significantly altered asset allocations—particularly to equities—among participants of all ages. As of year-end 2010, TDF-owning participants ages 35 and younger held, on average, 8.5 percentage points more in equities than non-TDF holders held. Among those ages 36–54, TDF owners held 7.9 percentage points more in equities.  

Although the Vanguard study focused on younger investors, the needs of older and tenured participants should also be considered, it said. Many in this group did not have auto-enrollment and a balanced default option when they entered their plan. Given the prevalence of inertia, they are likely to remain with their existing portfolio choices even if they do not offer proper diversification.   

These participants may benefit from “reenrollment” strategies through which their holdings are transferred into the plan’s balanced default option. Those who prefer to retain their existing choices have the right to “opt out” of this transfer. Reenrollment can be implemented on a plan-wide basis or may target a specific participant population with portfolio concerns, Vanguard suggests.  

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