Comparing Public and Private Asset Allocations

Danielle Andrus

4 years ago

The National Association of Government Defined Contribution Administrators hosted a webinar in May digging into the new Public Retirement Research Lab database, which compiles information about public pensions. PRRL is a joint effort between NAGDCA and the Employee Benefits Research Institute.

The database includes data on 2.3 million participants and covers total assets of $113 billion, according to Jack VanDerhei, Research Director at EBRI.

Target-date funds dominate portfolios for younger investors, the database shows. Over 63% of total assets for public plan participants in their 20s are in target-date options, and more than 40% of total assets for people in their 30s are in those types of funds. The distribution starts to level out for older investors, with allocations for 21%, 15% and 12% at the 40s, 50s and 60s age cohorts.

Although TDFs also had a distinct age distribution among participants in private plans, it was less dramatic. Allocations dropped to 47% for people in their 20s, gradually decreasing to 22% for 40- to 49-year-olds, and 18.4% for the 50s and 60s cohorts.

Public pension participants were much more likely to favor money and stable value funds than those in private 401(k)s, VanDerhei said.

“The people approaching retirement age are much more reliant on the money and stable value in the public universe, getting all the way up to 29%, than they are on the corporate side, getting only up to 14.2% by the time they get in their 60s,” VanDerhei said.

Vince Ortega, Vice President and Relationship Manager at Capital Group | American Funds, noted that many plans offer large investment menus for participants to choose from, but “many of those options have very low utilization rates.”

Emerging markets, REITs, small-caps and specialty funds get less interest from participants, he pointed out.

“I think it’s fair to say that a number of participants, they may be overwhelmed and therefore oftentimes not making investment decisions that are in their best long-term interest,” Ortega said.

That might include some participants investing in a single option or even in multiple TDF vintages, he said.

Sponsors in private and public pension plans need to simplify their investment menus, according to Ortega, and make it “easier for participants to make better decision to improve their outcomes.”

Invesco’s Greg Jenkins said that there’s still a lot of opportunity to move plan participants into professionally managed, diversified options.

“There’s plenty of research showing that participants are not well-equipped to make their own portfolio decisions,” Jenkins, Head of Institutional Defined Contribution Plans and Managing Director, said.

VanDerhei said TDFs have played an “amazing role” in getting younger participants into equities. Data show that participants in their 20s with at least some of their assets in a TDF have equity allocations close to 90%. Those in their early 20s with no TDF investments have equity allocations under 20%, while those in their late 20s have just 40% of their assets in equities.

“If you’re in a planning environment in which you’re assuming you’re going to have some positive equity premium, and you want to make sure that the young individuals, the ones who are going to have the most time to invest their money, are going to be able to benefit from an appropriate equity concentration, you see the amazing role that the target-date funds play,” he said.

An examination of equity allocations for participants who have both a defined contribution plan and a supplemental defined benefit plan showed that equity allocations were troublingly low, according to Jenkins. Equity allocations in defined contribution plans were highest among younger participants, and dropped off among older participants. Allocations were between 40% and 70% for people in their 20s, rising slightly for people in their early 30s before trending down again.

“This is an indication of a trouble spot. If your participants are covered by a defined benefit plan, then they can afford to take more risk in their DC plan. They should hold more equity because of the portfolio bedrock that the defined benefit provides in their overall portfolio,” Jenkins said.

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