Study Compares Asset Allocations Across Two Generations of 401(k) Savers

Compared with their counterparts from 20 years ago, current 401(k) investors in their 20s allocated a similar share of their total assets to equities, but changed the mix, becoming less concentrated in equity funds and company stock and more concentrated in balanced funds, according to new research by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

The study, which draws on 20 years of data analyzed in the EBRI/ICI series of annual studies on 401(k) participants’ activities, makes a cross-generational comparison of 401(k) investors in their 20s by comparing 2015 data with 1996 data for the same age group.

20/20 Hindsight

While little has changed over the past 20 years in the share of younger 401(k) participants’ high concentration of assets invested in equities, the vehicles that younger savers are using to invest in equities have changed.

At year-end 2015, 401(k) plan participants in their 20s held 80% of their aggregate assets in equities, compared to 77% for their 1996 counterparts. In 1996, savers in their 20s allocated 55% of their aggregate assets to equity funds, but the year-end 2015 data shows the level dropping to 28% of assets invested in equity funds for that same age group. In addition, the share of assets that 401(k) participants in their 20s allocated to company stock fell from 17% in 1996 to 5% at year-end 2015, the report shows.

Balanced Funds and TDFs

So what gives? “One factor influencing this 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,” says Sarah Holden, ICI’s senior director of retirement and investor research.

In 1996, participants in their 20s allocated only 8% of their 401(k) plan assets to balanced funds. In comparison, 54% of assets for participants in their 20s were invested in balanced funds at year-end 2015, with much of that (47%) in target-date funds. (The report notes that target-date funds were not reported separately in the database before 2006.)

“Today’s update reveals that 401(k) participants in their 20s are diversifying their 401(k) investments in what many perceive to be an age-appropriate manner,” says Jack VanDerhei, EBRI’s director of research. “In 2015, only 7% of these young participants had no equity allocation in their 401(k) plans. Moreover, 75% 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,” VanDerhei adds.

EBRI notes that these trends also are similar among all age groups in the database. Overall for the period 1996 to 2015, allocations to company stock decreased from 19% to 7%, allocations to equity funds decreased from 53% to 43%, and balanced funds increased from 7% of assets to 25%.

Further noting the increasing popularity of TDFs, the EBRI/ICI 401(k) database shows that investments in TDFs increased in 2015 to 20% of assets, up from 5% at year-end 2006, and nearly half of the 401(k) participants tracked in the database held these funds.

In addition, recently hired participants allocated a larger portion of their balances to them. At year-end 2015, 60% of recently hired participants held TDFs and accounted for more than one-third of their assets.

The study is based on the EBRI/ICI database of employer-sponsored 401(k) plans, which at year-end 2015 included statistical information on 26.1 million 401(k) plan participants in 101,625 employer-sponsored 401(k) plans, holding $1.9 trillion in assets and covering nearly half of all active 401(k) participants.

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