Defined contribution plans are the most common way that Americans save for retirement, with $9 trillion collectively saved in these types of plans, according to Julie Varga, Vice President of Product and Investments at Morningstar Investment Management. That’s why “it’s incredibly important to take a look at whether gender makes any sort of a difference in the effectiveness of how these plans are administered,” she said on a webinar during the Broadridge Fi360 Solutions Annual Conference 2021.
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Increased gender diversity
Morningstar conducted an analysis to determine the “diversity dividend” in 401k plan administration. Using Forms 5500, the report inferred from the signature on the form whether the administrator was a man or a woman. Morningstar found that since 2000, women are about equally represented among 401k plan administrators.
Varga said that the largest plans have always been more diverse than smaller ones, so it doesn’t look like they have made much progress toward gender equity relative to others.
“We can see that the gender diversity is improving,” she said, “and then we wanted to see, does it really matter? Does it actually have an impact on the plans and especially the participants?”
Again using data from Forms 5500, researchers looked for plans that were adhering to ERISA 404(c) compliance; implementing automatic enrollment to increase participation; and offering default investment options. They compared data from 2009 to that of 2017.
These plan design features are increasing across all plans, Morningstar found, but “there’s clear evidence that the probability of offering the feature initially, or adding it over time, is higher if the administrator is a female.”
The report didn’t examine why this might happen, but Varga believes that male administrators” career paths, which tend to begin in investment management, play a role in this trend. “Maybe they’re more focused on investment performance than with these other attributes around the plan governance,” she suggested.
Adoption of managed accounts
Participants are more likely to use managed solutions when they’re younger, according to Diana Velasquez, SVP of Consultant Relations at Morningstar, shifting to more self-directed strategies as they age.
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“We really wanted to figure out whether this was a good or a bad thing, and spoiler alert, it is not a good thing,” she said. “Our evidence suggests that younger participants made better choices overall than older participants in all of 2020.”
It might be counterintuitive that less experienced investors make better choices, but it comes down to how willing they are to let others do it for them.
“We would consider these older investors the most behavioral and made the worst investment decisions. This is exactly what we don’t want to see. When you’re older, decisions like these have a devastating impact because your balances are the largest,” Velasquez said. “We don’t know why this effect exists, but we do know is that we need to be doing more to get older participants into managed solutions, because when they sell, they make really poor choices.”
Morningstar compared behaviors and outcomes for four groups of investors: people invested in target-date funds, self-directed investors, and those who opted into or were defaulted into a managed account. The dataset includes recordkeeper information on over half a million participants in 660 plans through the end of 2020, Velasquez said.
Morningstar found most people maintained their investment strategy, but older people and more conservative investors were more likely to make changes in their accounts last year. The biggest determinant was account balance, Velasquez said, as people with higher balances were more likely to make a change. Only 1.7% of self-directed investors made a change, compared to 2.8% of people who moved out of managed accounts and 3.5% who changed their minds about a target-date fund.
People who made changes in their accounts last year were more likely to invest aggressively in the first quarter, but become more conservative as the year wore on, Velasquez said.
” They captured the loss, and they missed the entire game on the outside looking through the gender lens you can see males are much more likely to make a change to their equity allocation.
About two-thirds of investors who made a change in their portfolio underperformed, Velazquez said. Managed account investors were a little “sticker,” she said, “perhaps it’s because it’s a more personalized allocation.”
DC education for remote workers
Another trend that has become more important since the pandemic is the impact that education has on remote workers versus people working in an office.
Related: How 401k Planning and Saving Differs with Remote Workers
Sean Klock, Head of Workplace Regional Sales at Morningstar, noted that more than one in five workers are expected to continue working remotely after the pandemic, and their attitudes and preferences for investing are critical to plan design. Morningstar research shows that remote workers tend to eschew common default investments like target-date funds, preferring more personalized solutions like managed accounts.
Remote workers tend to be older, wealthier and nearly 5% less likely to rely on the default investment, Klock said. “Even when controlling for age and income, there’s a clear effect where remote participants are less likely to use target-date funds.”
On the other hand, remote workers of all ages and incomes prefer managed accounts. “This bears itself out in other research that we’ve seen before, where when you get older, your financial situations get more complex, and participants are more concerned about retirement,” Klock said.
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
