3 Funds Favored by Public Sector DC Plan Participants

PRRL 3 funds, public sector DC plans

Image credit: BigStock © Iryna Imago

Despite access to a myriad of choices, the majority of participants in public defined contribution retirement plans favor just three investment funds, according to new research from the Public Retirement Research Lab (PRRL), a joint venture of NAGDCA and the Employee Benefits Research Institute.

Additionally, women participants tend to opt for target-date funds while men are more likely to favor equities.

The report, “A Deeper Look at Asset Allocation,” finds the largest allocations on a dollar-weighted basis are to Large-Cap Domestic Equity (32.2%), Stable Value/Fixed Account (16.6%), and off-the-shelf Target-Date Funds (10.3%).

On a participant-weighted basis, Target-Date Funds (Off-the-Shelf) receive the largest allocation (20.2%), followed by Stable Value/Fixed Account (17.6%), and Large-Cap Domestic Equity (17.1%). Target-Date (Custom) has an allocation of 15.4%, although this asset class has an allocation of just 4.6% on a dollar-weighted basis.

Matt Petersen

“The concentration of public sector DC assets in a few investment options—especially stable value and equities—requires further investigation. However, given the variety of retirement system structures in the public sector, any one cause is unlikely to have a universal application,” said Matt Petersen, NAGDCA Executive Director.

There are two views on the difference in equity proportions between participants in supplemental DC plans and those in primary or mandated DC plans, Petersen added.

“One states that those with a primary DB plan might be in a position to assume more risk in their DC plan; the DB plan be seen as a fixed-income holding, allowing greater ownership of equities in the DC plan, especially for younger participants. Another view states that those with supplemental DC plans may feel little need to take on additional risk for potentially enhanced returns given their possession of a DB plan,” he said.

“A Deeper Look at Asset Allocation” includes analysis and graphic representation of public sector defined contribution (DC) allocation for asset classes by age, tenure, plan type, salary, gender, and plan structure; i.e., whether the DC plan is primary or supplemental, voluntary or mandatory. The PRRL collects and analyses public sector defined contribution data to provide unbiased, actionable findings to better inform public plan design, management, innovation, and legislation.

“It’s safe to conclude that demography and DC plan structure—primary/supplemental, mandatory/voluntary—are key determinants of effective plan design,” Petersen said. “We anticipate future analysis focused on identifying the underlying reasons for these and future findings, and remain confident that better understanding of public sector DC plan utilization through analysis of PRRL data will enhance public DC plan design, delivery, and communication solutions.”

More key findings

Allocation to equity correlates with target-date fund exposure, especially for those under age 50

Young participants in supplemental DC plans have lower allocation to equities

Females are more heavily weighted in target-date funds, males in equities

“The gender findings in this study are particularly noteworthy,” said Lori Lucas, EBRI President and CEO. “Females are more likely to invest in target-date funds in public sector plans, and when they do, their asset allocation is very similar to their male counterparts’. However, for those with no target-date fund exposure, equity exposure is much greater for males than females, especially at the younger ages. This shows what a great equalizer target-date funds can be when it comes from a diversification and risk-taking perspective.”

PRRL’s “A Deeper Look at Asset Allocation” may be accessed here.

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