The number of plans offering target-date funds—which determine portfolio allocations based on an expected retirement date and turn more conservative as a participant approaches retirement age—has steadily increased in recent decades. At the same time, a growing number of companies are providing target-date funds as the default for automatic enrollment programs.
The same is true of managed account advice platforms, whose availability has grown by nearly 30% in the past five years. As of 2022, the service was offered to 77% of Vanguard DC plan participants.
"Age-appropriate allocations aren’t the only advantage of this trend toward target-date funds and managed account advice," Clark said. "We’re also seeing record-low portfolio trading, which is remarkable given the market volatility we experienced last year."
During 2022, just 6% of DC plan participants initiated a trade within their accounts. Among participants who hold a single target-date fund, just 2% made an exchange.
Another trend is the reduction in extreme equity allocations among participants. The percentage of participants with no allocation to equities has fallen by about three-quarters, from 13% when the Pension Protection Act of 2006 was passed to 3% in 2022. (The Pension Protection Act introduced qualified default investment alternatives—typically a diversified investment option like a target-date fund, a managed account, or a balanced fund—to DC plans.)
At the other extreme, the percentage of participants investing exclusively in equities has declined from 19% to 4% over the same period. Investors who create their own asset allocations, meanwhile, are more likely to hold extreme equity portfolios; 20% of do-it-yourselfers did so in 2022.
How have these trends affected participant outcomes? When we look at five-year annualized returns, professionally managed allocations (notably, target-date funds and managed account advisory services) experienced less dispersion in outcomes. In other words, participants who managed their own allocations were more likely to see greater variability in returns.