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.

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.  

“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.


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.