401(k) activity was punctuated by a few spikes in trading activity followed by long lulls of low activity in 2016, a reflection of the uncertainty caused by world events such as Brexit and the U.S. elections.
Part of the light trading activity can be explained by the prevalence of target date funds, according to Aon Hewitt.
The company’s 401(k) index reported 28 days of above-normal daily transfer activity in 2016—slightly less than the trailing 5-year and 10-year averages (32 and 35 days, respectively).
Nearly one-third of the above-normal days of trading occurred in the weeks leading up to the U.S. Presidential election.
For 2016, a net total of 2.13 percent of balances traded—slightly higher than the trailing five year average (2.02 percent), but below the trailing ten year average (2.59 percent).
Overall, the percentage of assets invested in target date funds continued to climb in 2016, with target date funds representing 24.1 percent of total assets as of year-end, up from 23.1 percent at the end of 2015 and only 16.5 percent of the assets in the Index in 2011.
Conversely, the percentage of assets invested in company stock continued to decline. At the end of 2016, company stock represented 8.7 percent of total assets—compared to 9.5 percent in 2015.
In general, participants tended to trade into fixed income funds from equity instruments in 2016. The first ten months of the year heavily favored fixed income, while November and December favored equities. Stable value funds received the most inflows while the majority of outflows came from company stock.
After reflecting contributions, trades, fund changes, and market activity, participants ended the year with 65.4 percent in equities, which is unchanged from 2015.
2016 represented a generally strong year for investors as many major asset classes saw positive returns. U.S. bonds delivered positive returns for the majority of the year, but then pulled back towards the end of the year.
U.S. Large Cap equities and U.S. Small Cap equities saw moderate returns for the majority of the year before surging in the final two months. International equities saw brief volatility in the middle of the year but rebounded to post moderately positive returns for International Equity investors.
Earlier TDF report
The study, “Help in Defined Contribution Plans: 2006 through 2012,” examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers. It found that on average, employees using Help had median annual returns that were 3.32 percent higher, net of fees, than participants managing their own portfolios. If two participants—one using Help and one not using Help—both invest $10,000 at age 45, assuming both participants receive the median returns identified in the report, the Help participant could have 79 percent more wealth at age 65 ($58,700) than the Non-Help participant ($32,800).
“We recognize that many workers benefit from some professional assistance with their investing,” explained Rob Austin, director of retirement research at Aon Hewitt. “Help can significantly impact workers’ long-term savings outlook by giving them the resources they need to make smarter investment decisions. The key is to use Help in a way that maximizes results.”
Use of Target-Date Funds
The study found that more than 60 percent of workers who hold money in target-date funds also invest in other funds. Among partial target-date fund users, the average allocation to target-date funds was just 35 percent.
“Target-date funds play an essential role in a well-designed 401(k) plan and can be a cost-effective, all-in-one solution for participants with simple needs. However, when employees fail to invest in them exclusively, they often end up undermining the benefits of these funds, which are controlling risk and providing good diversification,” said Wei-Yin Hu, vice president of financial research at Financial Engines. “Improper use occurs for a variety of reasons, including an employer matching in company stock, workers attempting to time the market, or a lack of understanding of how target-date funds work. Participants may also simply be averse to putting all of their money in one fund as their balance grows.”
Target-date fund misuse is hurting investment returns. The study found that, on average, workers who were partially allocated to target date funds had median annual returns that were 2.11 percent lower, net of fees, than individuals exclusively using target date funds and 2.61 percent lower than those in managed accounts.[2]
Help Usage Over Time
The Financial Engines/Aon Hewitt study found that automatically defaulting workers into target-date funds does not necessarily ensure these funds will be used appropriately. Even when employees start with their entire retirement portfolio invested in a target-date fund, only 57 percent of them remained fully invested in that fund after five years. By contrast, 87 percent of participants enrolled in managed accounts remained in them over the same five-year period.
“Automatically enrolling workers in 401(k) plans has encouraged many who might not have saved for retirement to begin saving,” said Austin. “However, many employees are making investment decisions that run counter to how the plans are intended to work, which can damage their long-term savings outlook. Companies that have automatic enrollment should determine if workers are using the plan appropriately, and if not, make adjustments such as educating participants about proper diversification.”
Different Types of Help Needed for Different Employees
According to the study, age and plan balance were the strongest indicators of the type of Help employees would be most likely to use. Younger workers with lower account balances and lower contribution rates were more likely to hold target-date funds while younger participants with larger plan balances tended to prefer online advice. Older employees with higher average account balances and higher contribution rates favored managed accounts.
“While everyone’s needs are different, it is clear that most employees benefit from getting help with their retirement investing,” said Financial Engines’ Hu. “The key is that you can’t take a one-size-fits-all approach. Employers can enhance their 401(k) plans by offering all three forms of Help. Most importantly, companies need to continue educating employees on how best to save and invest for retirement.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
