PLANSPONSOR - October 2017 - 17

The
Dramatic
Change in
Participant
Investing
WHEN one looks over 20 years of the
Alight Solutions 401(k) Index-formerly
the Aon Hewitt 401(k) Index-two major
trends emerge: 401(k) portfolio allocations
have changed dramatically, and
trading activity has steadily decreased
except when market corrections occur,
according to an analysis by the firm.
The analysis finds that, in 1997, the
asset class with the greatest percentage
of participant balances was company
stock (29%). However, since that time,
employers have made changes to curb
how much flows to their own stock. Some
have removed company stock as an investment
option while others have placed
limits on how much can be invested in
it. As a result of these changes, company
stock now comprises less than 10% of
401(k) balances in the 401(k) Index.
On the other hand, in 1997, only 1%
of 401(k) assets were in premixed portfolios.
Now, target-date funds (TDFs) are
the largest asset class in the index (25%).
Since the Pension Protection Act of 2006
(PPA) greenlighted the way for automatic
enrollment, employers have steadily
been adopting the feature. Moreover, the
PPA explicitly paved the way for TDFs to
be the default investment fund.
From 1997 to 2017, asset allocations
in large cap U.S. equity funds has
remained relatively stable. But allocations
to stable value funds dropped from
While roughly 70% of investors use
TDFs, about half of them have another
investment in their 401(k) portfolio.
In addition, those workers who are
exclusively invested in TDFs have an
average plan balance that is much
lower than the average balance of those
invested in TDFs and other investments.
" Ultimately, this means that the fraction
of balances in the 401(k) Index that are
attributable to investors with only TDFs
is fairly small and, therefore, would not
be the primary reason for the decrease in
trading activity, " Alight says.
Alight observes that, in 2016, there
While roughly 70% of investors use
TDFs, about half of them have another
investment in their 401(k) portfolio.
23% to 11%. This also can be attributed
to the PPA and subsequent regulations
about qualified default investment alternatives
(QDIAs).
Participant trading in 401(k) plans
slowed between 1997 and 2017, but,
Alight notes, the rise of TDFs is not the
sole reason for the trading slowdown.
Asset Allocation in 401(k) Index
n August 1997 n August 2007 n August 2017
29%
26%
21%
18%
8%
1%
Company stock
Source: Alight Solutions 401(k) Index
Large cap U.S. equity
Stable value
Target-date funds
24%
23%
20%
11%
8%
25%
were 28 days of " above-normal " trading
activity. Roughly one-third of these
occurred just prior to the U.S. presidential
election, on November 8. On the day immediately
after the election, the net trading
activity was 0.10% of balances-about 4.5
times a normal trading level and easily the
highest trading day of 2016. -PS
PLANSPONSOR.com October 2017 17
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PLANSPONSOR - October 2017

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