According to a Vanguard report, one of the big trends in the 401k market is the move toward professional asset management. An article at AdvisorOne on this topic says:
One-third of all Vanguard 401(k) plan participants invested their entire account balance in a professionally managed asset allocation and investment option in 2011, according to Vanguard’s How America Saves 2012, an annual report on how U.S. workers are saving and investing for retirement.
The report notes that “the increasing prominence of so-called professionally managed allocations—in a single target-date or balanced fund or through a managed account advisory service—is one of the most important trends in 401(k) and other defined contribution (DC) plans today.”
Two things concerned me about the report. I’m not at all surprised by more and more 401k participants moving toward professionally managed allocations. QDIAs (qualified default investment alternatives) make sense for a lot of participants because they are legally allowed to be your entire investment program. I was surprised about the make-up of the account allocations, given the problems encountered by target-date funds during the last bear market.
In 2011, 33% of all Vanguard participants were invested a professionally managed allocation program: 24% in a single target-date fund (TDF); 6% in a single traditional balanced fund, and 3% in a managed account advisory program. The total number is up from 9% at the end of 2005.
I am amazed that target-date funds are preferred to balanced funds. No doubt target-date funds are an improvement over investors hammering themselves by trading in and out, but target-date funds have some well-publicized problems, not the least of which is that they tend to push the portfolio more toward bonds as the target date nears. That could end up exposing retirees to significant inflation risk right at the time they can least cope with it. It seems to me that a balanced fund with some ability to tactically adjust the portfolio allocation over time is a much better solution.
The other significant problem I see is that savings rates are still far too low. Consider these statements from the AdvisorOne article:
The average participant deferral rate rose to 7.1% and the median (the median reflects the typical participant) was unchanged at 6%.
and then…
Vanguard’s view is that investors should save 12% to 15% or more.
I added the emphasis, but it’s easy to see the disconnect. Investors are saving 6%, but they probably need to be saving more than 15%!
Advisors, for the most part, have very little control over their client’s 401k plans. Clients sometimes ask for advice informally, but advisors are often not compensated for the advice and firms are sometimes reluctant to let them provide it for liability reasons anyway. (A few advisors handle client 401k’s through the independent brokerage window, but not every plan has that option and not every firm lets advisors do it. It would be great if the financial powers-that-be could figure out a way to reverse this problem, but the recent Department of Labor regulations appear to be going in the other direction.)
If you’re an advisor, it’s probably worthwhile to have a serious discussion with your clients about their 401k plans. They may not be handling things in the optimal way and they could probably use your help.
Your client may need your help
Source: investortrip.com
[...] Americans are still not saving enough for retirement. (Systematic Relative Strength) [...]
Few employees have the time to do it themselves and most do not get the personal attention they need to make these difficult decisions. I am a registered rep and I find it difficult to find time to manage my own 401k so I would imagine that for most employees it is out of sight-out of mind. Very sad.
One other thing about Target Date Funds that has had little press: The average credit quality in the bond portfolio. In a 401k plan with over 6,000 active participants and $167 million in plan assets, I noticed that roughly $44 million was invested in Target Date Funds.
More to the point, the seven funds from 2020 through 2050 have an average credit quality below investment grade, commonly referred to as “Junk Bonds.” The four funds from 2000-2015 all have a BBB rating which, although the lowest possible investment grade rating, are described by S&P as medium class borrowers, which are satisfactory at the moment.
Hardly call any of that safe!