Are Younger 401k Participants Finally ‘Growing Up?’

Vehicles they're using to invest have changed

401k, gen x , millennials, retirementIs youth still squandered on the young?

Smart phones versus flip, Nirvana versus Taylor Swift. ICI and EBRI recently drew on 20 years of data for a different look at 401k plan effectiveness, comparing younger investors from decades past with their counterparts of today.

No surprise (thankfully), both invested heavily in equities; what is surprising is the way in which they did so.

“Compared with 1995, the 20-something 401k investors of 2015 allocated a similar share of their aggregate assets to equities—including equity funds, company stock, and the equity portion of balanced funds—but changed the mix, becoming less concentrated in equity funds and company stock and more concentrated in balanced funds (which include target-date funds),” the report read.

One factor influencing the trend is that today’s younger investors are relying more on the automatic rebalancing feature of target-date funds to keep their assets allocated in an age-appropriate way as they progress through their careers, according to Sarah Holden, ICI’s senior director of retirement and investor research.

Additionally, the vehicles that younger savers are using to invest in equities have changed.

Savers in their 20s allocated 28 percent of their aggregate assets to equity funds at year-end 2015—about half of the 55 percent share allocated by that age cohort in 1996.

Similarly, the share of assets that these younger 401k participants have allocated to company stock has fallen, from 17 percent in 1996 to 5 percent at year-end 2015.

Instead, younger 401k participants have invested their assets much more heavily in balanced funds, which include target-date funds. At year-end 2015, 54 percent of assets for participants in their 20s were invested in balanced funds, much of that (47 percent) in target-date funds. In 1996, participants in their 20s allocated only 8 percent of their 401k plan assets to balanced funds (target-date funds were not reported separately in the database before 2006).

These trends also are mirrored among all age groups in the database. Overall, allocations to company stock decreased from 19 percent in 1996 to 7 percent in 2015, allocations to equity funds decreased from 53 percent in 1996 to 43 percent in 2015, and balanced funds increased from 7 percent of assets in 1996 to 25 percent in 2015.

“Today’s update reveals that participants in their 20s are diversifying their 401k investments in what many perceive to be an age-appropriate manner,” said Jack VanDerhei, EBRI’s director of research. “In 2015, only 7 percent of these young participants had no equity allocation in their plans. Moreover, 75 percent of this group had at least 80 percent of their 401(k) balances invested in equities in 2015, due in large part to the increased utilization of target-date funds.”

Speaking of target date funds, the study confirms that target-date funds continued to be popular in 401k plans among all ages, and particularly among recently hired participants, at year-end 2015.

The database shows that investments in target-date funds increased in 2015 to 20 percent of assets, up from 5 percent at year-end 2006, and that nearly half of the participants held these funds.

Recently hired participants are even more likely to hold target-date funds, and to have allocated a larger portion of their balances to them: at year-end 2015, 60 percent of recently hired participants held target-date funds, and these funds accounted for more than one-third of their assets.

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