New research from the Morningstar Investment Management group, “No Portfolio is an Island,” indicates that employers should consider more than stocks and bonds when developing the optimal asset allocation in custom target-date solutions. Financial assets represent only one aspect of a person's total wealth. A participant's human capital, home location, and pension benefits have value that may actually exceed the value of their financial assets. For years, accomplished academic researchers have explored the worth of human capital - defined as a person's ability to earn and save over time - suggesting that it contributes significant
value to a household's wealth.
Morningstar research concludes that employers interested in improving participant outcomes should consider the non-financial assets of their participant base when developing custom target-date solutions. To illustrate the potential impact on asset allocations, we outline scenarios for three participants and show how taking a total-wealth perspective when designing a custom target-date solution can help participants better prepare for retirement. The corresponding graphs represent notable changes to the participants' portfolios after considering region, industry, and pension benefits.