IMHO December 26, 2008
IMHO: The Way We Were
As a parent (or even a mentor), sooner or later, you’ll wind up sharing tales of the way things “used to be.″
Reported by Nevin E. Adams
Whether it’s a tale of the proverbial five-mile walk to school in the snow (“uphill, both ways’), the challenges of adjusting a tinfoil-laden TV antenna to obtain a decent black-and-white picture on one of four channels, or the days of laboring to get a quarterly valuation completed by six weeks AFTER the valuation cycle, the story-telling traditions of humankind are part of what makes us – well, human. By sharing a sense of where we have been, we all gain a better sense of the importance of where we are – and an appreciation (hopefully) for the progress that we’ve made.
Now, according to a recent survey, it seems that we may well be on our way to a day when participant direction of their investment accounts seems as quaint a notion as a quarterly transfer.
The aptly, if somewhat awkwardly, titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007’ by the Employee Benefit Research Institute (EBRI) indicates that lifecycle funds, a.k.a. target-date funds, were available in two-thirds of 401(k) plans in the year-end 2007 database the firm maintains with the Investment Company Institute (ICI), up from 57% in the prior year’s report (see Only 7% of 401(k) Assets Invested In Lifecycle Funds). That means that two-thirds of the EBRI/ICI database, some 14.7 million participants, had an opportunity to choose those investment options. And, in fact, EBRI reports that, among participants offered lifecycle funds, 37% held them at year-end 2007.
Doubtless, the Labor Department’s embrace of the qualified default investment alternative (QDIA) design (among which target-date offerings loom large) accounts for much of the increase in availability. Still, at year-end 2007, more than one-third of recently hired 401(k) participants held lifecycle funds, while at year-end 2006, 28% of recently hired 401(k) participants did so.
The EBRI study noted that younger participants were, in fact, more likely to hold lifecycle funds than older participants: 29% of participants in their 20s held lifecycle funds, compared with 19% of those in their 60s. And more-recently hired participants were more likely to hold lifecycle funds than participants with more years on the job; 34% of those with two or fewer years of tenure held lifecycle funds, compared with 23% of those with five to 10 years of tenure – and just 14% for those who had been in the workforce for more than 30 years.
That augers well for the future, of course. And consider that, at year-end 2007, nearly half (48%) of recently hired participants holding balanced funds had more than 90% of their account balance invested in balanced funds, compared with a mere 7% in 1998. On the other hand, note also that “less than half’ of those with an investment in what is ostensibly an already-balanced fund did NOT have more than 90% of their account in that option. Indeed, one of the issues with asset allocation solutions is that participants often still seem to view them as one more choice on the menu, rather than THE choice from the menu (see ). It remains to be seen how the current generation of target-date funds – many of which still have fee structures, glide paths, and underlying asset classes that are wildly varied – will hold up amid the current market turmoil.
Still, one can’t help but wonder if – a decade or so from now – we’ll find ourselves trying to explain to a new generation of retirement plan advisers how much time, energy, and effort we used to spend trying to help participants make their own investment decisions.
And if they’ll wonder why we did.