Participants who used any type of professionally managed portfolio solution were “significantly less likely to trade” in 2020 than those who did it themselves, according to a new paper from PGIM.
“The diversification benefits of the multi-fund strategy are more apparent than a single multi-asset fund strategy.”
PGIM
Older, self-directed participants made the most significant changes, according to a new paper from David Blanchett and the research team, which analyzed trading activity for 730,533 participants. It also focused on how allocating to a guaranteed lifetime income product affected behavior.
“We find that participants using any type of professionally managed portfolio solution were significantly less likely to trade in 2020 than those who were self-directing,” PGIM wrote of the key findings.
While older participants were more active, they were also less likely to use a professionally managed portfolio option, suggesting that “those participants who may benefit most from professional investment management are not the ones receiving it.”
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Target-date funds and similar managed products are largely credited for keeping participants invested and on track through market shocks. Yet, those who defaulted in a multi-fund professionally managed portfolio traded less than those who defaulted in a single fund professionally managed strategy like a TDF.
“While the exact reason for this effect is unclear, a potential explanation could be that the diversification benefits of the multi-fund strategy are more apparent than a single multi-asset fund strategy (i.e., the participant would log in and see an 8+ fund portfolio versus holding a single target-date fund, which would appear to be more like a “black box”),” researchers added.
Guaranteed income products
Finally, older participants, those aged 55-70, with higher allocations to an annuity that provided guaranteed lifetime income and higher allocations to that annuity were less likely to trade during 2020.
“This suggests guaranteed (or protected) income products have the potential to not only simplify the retirement income decision process but may also improve participant trading behaviors,” PGIM concluded.