More 401(k) participants are invested in single target-date, balanced fund or managed account advisory services, according to Vanguard’s “How America Saves 2011” report.
The report, which was released on Wednesday, revealed that almost 30% of participants in 401(k) retirement plans at Vanguard are in automatic professionally managed investment programs, which is good for those new to investing or those who lack the experience or skills to invest on their own.
“The growing number of participants taking advantage of professionally managed investment programs and services in their plan clearly shows that the 401(k) system can offer investors a successful way to invest for retirement,” said Jean Young, coauthor of How America Saves 2011, in a press release. ”These services have the potential to dramatically reshape portfolio outcomes for participants because they address the need of many individuals who don’t have the skills to manage their retirement assets.”
At the same time, the report also showed that in 2010 account balances jumped to their highest levels since Vanguard began tracking them in 1999. In 2010, the average account balance was $79,077 and the median was $26,926, which points to ongoing contributions and improving investment returns. The median account balance for participants in their plan at both year-end 2007 and year-end 2010 grew by 31%, reported Vanguard. Eight in 10 of these “continuous” participants saw their balances increase or stay flat.
“Account balances have been cited as too low to be helpful in retirement,” said Steve Utkus, coauthor of the report. “But keep in mind that the typical participant is a 46-year-old male who is saving 8.8%, with 20 to 25 more years to work and grow his account. His retirement plan assets will be complemented by Social Security benefits and other savings, perhaps assets in other employer plans or a spouse’s plan, or personal savings. Even though we always encourage people to save more—ideally at least 12% to 15% of their income—the reality is that many participants may be on target for retirement.”
Vanguard points out that professionally managed investment programs, such as single target-date, balanced fund or managed account advisory services, are critical because they eliminate portfolio construction mistakes by many participants. But at least in the case of target-date funds, retirement plans that combine stocks, bonds and other investments and become more conservative as the investor approaches retirement age, there has been significant criticism about these plans. These mutual funds are supposed to take the guesswork out for investors by allowing them to choose the year they intend to retire and then the asset allocations are chosen for them.
Yet reality is never as easy as it sounds. Like the stock market, these target-date funds got slammed during the recession, losing an average of 23% in 2008. And the 2010 funds, intended for those retiring at or around 2010, became the subject of scrutiny and anger as investors feared that they had lost a good portion of their retirement money.
As Washington grew concerned that investors were being duped by conflicts of interest and false advertising, in stepped Senate Special Committee on Aging Chairman Herb Kohl, D-Wis. Kohl announced last month that he would be introducing legislation that would require target-date fund managers to take on fiduciary responsibilities, which would mean they’d have to put investors’ interests above their own, as well as face increased regulation and legal liability. He also questioned investing in junk bonds as part of a target-date fund’s underlying investments. Morningstar found that six of the nine largest U.S. target-date funds invest in high-yield, high-risk corporate bonds.
Meanwhile, 20% of those surveyed by Vanguard held one target-date fund, 6% held one traditional balanced fund and an additional 3% used a managed account program. In 2004, just 7% of all Vanguard participants were solely invested in an automatic investment program.
In addition, about 15% of participants use advice services if offered, with managed accounts the most popular.
How America Saves 2011 is based on Vanguard’s 2010 recordkeeping data for more than 3 million participants in over 2,000 qualified defined contribution plans.