PLANADVISER - November/December 2017 - 26

trendspotting
401(k) Allocations Have Changed
TDFs now comprise 25% of 401(k) assets, largely due to auto-enrollment
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
TALKING POINTS
Rocky Road
Nearly three-quarters-72%-of advisers
think the political environment will cause
market volatility for the remainder of the year.
Source: Eaton Vance Investment Managers, Advisor Top-of-Mind Index
Mixed Reaction
While 40% of people say the financial crisis
of 2008 has had no lasting impact on their
life, 42% say they now avoid the market,
according to a Hartford Funds survey.
Underestimating Health
Care Costs in Retirement
A survey by Financial Engines found that 58%
of respondents at least 65 years old, and 76%
of those 55 through 64, believe the average
married couple retiring at 65 would need
between $50,000 and $200,000 for health
care. Financial Engines says it is $266,000.
26 | planadviser.com november-december 2017
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. -Rebecca Moore
http://www.planadviser.com
PLANADVISER - November/December 2017

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