Defined contribution plan participants have become less extreme in their investment strategies, moving away from lopsided allocations of equities or fixed income to a more diversified investment lineup.
Although participants are acting in part on their own accord, record keepers that track clients' investing behavior say plan design changes over the years are the driving force.
At Fidelity Investments, Boston, extreme portfolios — either 100% equity or zero equity — have declined dramatically since 2006, the year the Pension Protection Act was enacted. Among other things, the law established qualified default investment alternatives, which have spurred the growth of target-date funds. Balanced funds and managed accounts are the other QDIAs endorsed by the law. The PPA also encouraged greater use of auto enrollment by providing a safe harbor for sponsors.
"Since the PPA, a lot of sponsors have really changed their plan designs," said Katie Taylor, Fidelity's vice president of thought leadership. Increased implementation of auto enrollment and auto escalation also have led to fewer extremes and greater diversification in participants' account balances, she said.
By year-end 2006, Fidelity said 34.7% of participants among its record-keeping clients had extreme portfolios. Since then, the rate has dropped every year, falling to 10.5% in 2018. For the first quarter of 2019, the extreme portfolio rate was 10%.
Among its clients, Fidelity said 8% of plans used a target-date series as a QDIA in 2006; by the first quarter of 2019, the rate had jumped to 90%.
Also, 6% of participants invested all of their retirement money in target-date funds in 2006. By the first quarter of 2019, the rate was up to 52%, based on Fidelity's analysis of 22,800 corporate DC plans — including adviser-sold DC plans — covering 16.8 million participants as of March 31.
When it analyzed six age categories, Fidelity found that extreme portfolio allocations steadily increased with age — from 5.2% of those in the 20-29 group to 25.2% in the 70-plus category. Older workers are less likely to be in target-date funds and more likely to be self-directed investors, Ms. Taylor said.