DC Participants Could More Actively Manage Portfolios

Only 15% of defined contribution (DC) retirement plan participants rebalanced their portfolios in 2014—making it one of the lowest trading years on record, according to Aon Hewitt’s analysis of 138 defined contribution plans, representing 3.5 million eligible workers.

Even when eliminating the participants who are fully invested in target-date funds (TDFs) or other premixed portfolio options—which do not require rebalancing—only 19% rebalanced their portfolios. Aon Hewitt also found that on average, participants were invested in just 3.6 different funds, down from 3.7 in 2013 and 3.9 funds in 2012.

Rob Austin, director of Retirement Research at Aon Hewitt, in Charlotte, North Carolina, tells PLANADVISER that overall, only about half of DC investors in TDFs go all in; half have another investment such as company stock or a bond fund. Even if participants are all in a TDF or managed account, they should periodically consider whether it is still the right investment for them, he suggests.

He adds that if a participant is thinking of retiring earlier or later, or has college costs to prepare for, it may warrant a change to investments—TDFs and/or any other investment. “At least annually look at whether your investments meet your objectives,” he says.

As for participants not in so-called “set it and forget it” investments, Austin notes that it is easy to look at a quarterly statement and, if the overall balance has gone up by a pretty good margin, believe no action is really needed. But, behind the scenes, different types of equity investments have different returns, and different types of bonds do as well. “Wherever they have their assets, the allocation has changed. They should at least sign up for automatic rebalancing, if available, to put their allocations back to the same percentage originally chosen, he says. Austin notes that this also conforms with the adage of selling high and buying low—for example, if large-cap equity had very high returns and bonds underperformed, rebalancing will sell large-cap equities and buy bonds.

Next: Other recommendations can help plan participants maximize their investments.

Aon Hewitt offers other recommendations for plan sponsors to help DC plan participants make the most of their investments:

• Offer access to help tools. A 2014 analysis from Aon Hewitt and Financial Engines showed that participants who take advantage of help tools, in the form of managed accounts, online advice and target-date funds, fare better than those who go it alone. Providing these resources allows participants the benefit of professional management, in order to optimize their returns.
• Simplify the fund line-up. Offering multi-manager, white-label or objective-based funds can make the investment process less complex for participants while providing them with better diversification. Additionally, these institutional funds may reduce fees for participants and potentially provide better returns, ultimately improving their long-term savings.
• Consider lifetime income options. Defined contribution plans have become the primary retirement vehicle for millions of Americans, but few of these plans provide a way for participants to manage their money during retirement. Lifetime income options can help ensure that retirees do not outlive their retirement savings and may remove the need for participants to actively rebalance their portfolios.

“Encouraging lifetime income is important to many employers, though it’s primarily leading-edge companies that are implementing these options for their workers,” explains Austin. “We expect to see more companies move in this direction as they gain a better understanding around new laws on longevity annuities and as the price, availability and quality of these types of products continue to improve.”

The Aon Hewitt analysis also revealed participation in 401(k) plans reached 79% at the end of 2014, the highest participation level since Aon Hewitt began tracking this data in 2002. The average plan balance also hit an all-time high of $100,320, up notably from $91,060 at the end of 2013. In addition, nearly one-quarter of workers (24%) increased their contribution rate in 2014.

These findings make it easy to say things are going well, Austin warns, but plan sponsors need to analyze how these numbers match what they want them to be.