DC Participant Trading Down as More Use Professional Help

Only 10% of DC plan participants surveyed by Vanguard say they engaged in retirement-related investment trades in 2013, according to Jean Young, senior research analyst at the Vanguard Center for Retirement Research. This is down from 20% in 2004.

However, this does not mean participants are sitting still when it comes to investing. Rather, says Young, more DC participants are making use of professionally managed funds or allocations. If this trend continues, the figures for trading by individual participants may decrease even further, according to Young, who is based in Valley Forge, Pennsylvania.

Young tells PLANADVISER, “In 2005, the [mutual fund] industry adopted 60-day round trip rules. This means that if a participant sells an equity mutual fund, they cannot repurchase it for 60 days. We attribute the decline in participant trading levels from 2004 to 2005 and 2006 to 2008 to this rule change.”

However, Young adds, “We’ve also found that over the past five years the adoption of professionally managed allocations (PMA)—in particular target-date funds—has just about doubled. At the end of 2008, just 22% of participants were in a PMA, while the number was 40% at the end of 2013.” She estimates that over the next five years, this figure will climb to as high as 58% of DC participants.

Among the four in 10 Vanguard DC plan participants that were invested in a PMA in 2013, their entire account balances invested in: a single TDF; a single target-risk or traditional balanced fund; or a managed account advisory service.

Young notes research has shown it is very difficult to time the market successfully. “Assuming participants start with appropriate asset allocations, less trading is generally a good thing. On the other hand, more participants should probably trade than do,” she says, adding that participants who are not in a PMA and are do-it-yourself investors are “really all over the map, with nearly a quarter of this group holding extreme portfolios—either zero or all equities.”

According to Young, more participants should be rebalancing their portfolios to a target asset allocation. Participants in PMAs do not need to trade because an investment professional is rebalancing the portfolio for them.

More information about Young’s research on this topic can be found here. Related research about TDF trends can be found here.