After a decade marked by two severe bear markets, 401(k) investors have adopted a more balanced approach to their portfolios, according to a report released Wednesday by the Investment Company Institute and the Employee Benefit Research Institute.

Fears that younger investors would abandon stock investment are not borne out by the figures, ICI and EBRI said—suggesting that 401(k) investors now and in the future are likely to embrace target-date funds with even greater enthusiasm.

However, the love affair with stocks and stock funds has waned considerably among 401(k) investors over the past decade; in 2000, 54.1% had more than 80% of their portfolio in equities, but in 2010, that dropped to 40%. The only age group where this moderating trend didn’t take hold was among workers in their 20s, with long time horizons. In 2000, 55.3% of twenty-somethings had 80% or more of their portfolio in equities. By 2010, this grew to 60.4%.

The study also showed that by 2010, 70% of 401(k) plans had target-date funds in their lineup, and that recently hired people in their 20s had 35% of their portfolio balances in target-date funds in 2010, up from 16% in 2006.

“Growing use of target-date funds appears to be helping to keep younger 401(k) participants invested in balanced portfolios—with equity exposure—to help their assets grow over the long term,” said Sarah Holden, ICI senior director of retirement and investor research. “While our surveys and others have shown that investors are less willing to take on stock market risk, 401(k) plan features are countering that trend for plan participants. That’s particularly valuable to provide younger participants diversified portfolios that include growth-oriented investments.”

The data also shows that average balances do not differ that much among different income groups. “Regulatory limits on both the amount of contributions by more highly compensated workers and the so-called ‘nondiscrimination tests,’ have doubtless played a role in maintaining this balance,” said Jack VanDerhei, EBRI research director.

The study also found that the average 401(k) balance grew 3.4% in 2010.

Lee Barney writes for Money Management Executive.



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