Vanguard: Asset Allocation Funds Help Participants Diversify

Vanguard said the diversification of target-date funds helped cushion the blow of bad markets.

The fact that 20% of participants in defined contribution plans administered by The Vanguard Group invested their entire nest eggs in an asset allocation fund at year-end 2008 helped shield the participants from the market’s turmoil during the year, new Vanguard research indicated.

A news release about the company’s “How America Saves 2009” study found nearly 70% of Vanguard’s plans offered the investment company’s own target-date fund products during 2008; 37% of the participants in those plans invested in one.

By year end, about half of Vanguard plans had designated a qualified default investment alternative (QDIA) and of those, 85% chose a target-date fund.

“The diversification within a target-date fund helped to diminish the impact of last year’s volatility on investors,” said Stephen Utkus, director of the Vanguard Center for Retirement Research, which conducts the yearly data analysis.

According to the Vanguard news release, the latest study also found that participants in general during 2008 remained committed to equities, engaged in only modest trading activity, and experienced overall losses far milder than the precipitous declines of the U.S. and international stock markets.

Utkus said: “Our research underscores that 401(k) plans continue to be an effective retirement savings vehicle.”

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Effects of Automatic Enrollment

Automatic enrollment is leading to more workers being covered by a retirement plan, Vanguard found. Employees covered by automatic enrollment plans at Vanguard had an overall participation rate of 84% in 2008 compared to 60% for plans with voluntary enrollment. About 20% of all Vanguard plans have adopted automatic enrollment, quadruple that of 2005.

Most participants saw smaller decreases in their account balances due to last year's market decline than has been widely reported. "Continuous" participants (the 75% who had a balance at both the beginning and end of the year) had a median decline of 14%. The median decline for an age group of particular concern—pre-retirees aged 55 to 64—was 16%.

Vanguard participants deferred an average 7% of their income in their plan. This deferral rate was down slightly from the 7.3% rate of 2007, a dip due mainly to the fairly low default deferral rate of 3% set by many automatic enrollment plan sponsors. The median participant deferral rate was 6%, unchanged since 2000.

At the end of 2008, 61% of existing plan assets (as distinct from future contributions) were invested in equities, a drop from 73% in 2007. The report estimates that eight percentage points of this movement came from declining stock prices and four percentage points from participants shifting assets to fixed-income holdings.

As Vanguard released in previous research, despite last year's market volatility, most participants made no trades at all (see “When Markets Get Cold, Many Participants … Do Nothing”). Only 16% of participants traded during 2008 and 2% abandoned equities. The remaining 14% engaged in a variety of other portfolio changes.

Participants who separated from service in 2008 largely preserved their assets for retirement. Sixty-nine percent either remained in their plan or rolled over their savings to an IRA or a new employer plan.

The number of new loans issued during 2008 declined by 12% from the 2007 level. Only 2% of participants took hardship withdrawals in 2008, a figure slightly higher than in recent years but still low overall.

The report is based on the 2008 plan-based behavior of more than 3 million participants in more 2,200 defined contribution plans administered by Vanguard.

The study report is available here.

Merrill Lynch Fund Manager Survey Finds Soaring Optimism

Fund manager optimism about the global economy is at its highest level in nearly six years, according to the Merrill Lynch Survey of Fund Managers for August.

Portfolio managers are putting their cash back into equity markets, and a net 75% of survey respondents believe the world economy will strengthen in the next year. That’s the highest reading since November 2003 and up from 63% in July, according to the survey results.

A net 70% of the survey respondents expect global corporate profits to rise in the coming year (compared to 51% last month).

The optimism is being put to action, with cash balances falling and equity allocations rising. Average cash balances have fallen to 3.5% from 4.7% in July, their lowest level since July 2007, according to Merrill Lynch. A net 34% of respondents are overweight equities, rocketing from a net 7% in July.

Merrill Lynch points to global emerging markets, led by China, and technology stocks as the strongest engines behind the recovery. Investors would rather be overweight emerging markets than any other region (a net 33%). However, that shows a drop from July, when 48% of the respondents most wanted to be overweight in emerging markets.

As far as sectors go, technology is in the lead, with 28% of the surveyed global fund managers overweight the industry. Industrials, Materials, and Banks lag with global fund managers holding 11%, 12%, and 10% overweight positions, respectively.

A total of 204 fund managers, managing a total of US$554 billion, participated in the global survey from August 7 to 12 August. The survey was conducted by Banc of America Securities – Merrill Lynch Research with the help of market research company TNS.

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