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By Chuck Epstein

Investment decision-making by 401(k) participants improved measurably in 2013, accompanied by a greater reliance on employer-selected advice programs, according to a report from Vanguard.

The report, “How America Saves 2014: A report on Vanguard 2013 defined contribution plan data,” found that the use of “professionally managed allocations,” such as those offered via target-date funds, produced better asset allocations and the number of participants who avoided taking excessive positions in company stock.

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The report noted that defined contribution retirement plans have become the mainstay of the private-sector retirement system in the United States. Over 88 million Americans are covered by DC plans, with assets now in excess of $5.5 trillion, according to Vanguard.

Vanguard said participants with “professionally managed allocations” were those who had their entire account balance invested in a single target-date or balanced fund or a managed account advisory service.

At year-end 2013, 40 percent of all Vanguard participants were solely invested in an automatic investment program, compared with 22 percent at year-end 2008. About 31 percent of participants were invested in a single target-date fund; another 6 percent held one other balanced fund; and 3 percent used a managed account program.

Vanguard said “these diversified, professionally managed investment portfolios dramatically improve portfolio diversification compared with participants making choices on their own.”

This was especially evident among people who had just enrolled in plans for the first time in 2013. Of this group, 75 percent of new plan entrants were “solely invested in a professionally managed allocation.”

This change toward the greater adoption of professionally managed investment options indicates “a shift in responsibility for investment decision-making away from the participant and toward employer-selected investment and advice programs.”

Due to the increased use of target-date funds, Vanguard predicted that 58 percent of all participants and 80 percent of new plan participants will be entirely invested in a professionally managed allocation by 2018.

Greater reliance on professionally managed allocations has also improved portfolio diversification exposures, Vanguard said.

Its report found that the number of participants who had no equity exposure in the 401(k)s had fallen by half, from 13 percent in 2004 to 6 percent in 2013. Alternately, the number of participants investing exclusively in equities had fallen from 22 percent to 8 percent over the same period.

Similarly, the expansion of professionally managed allocations in 401(k)s has also reduced the number of what Vanguard termed “portfolio construction errors.”

This included a greater number of participants holding broadly diversified portfolios. This number improved from 37 percent in 2004 to 66 percent in 2013. The data also showed that participants who held concentrated stock positions were cut by almost 50 percent, along with reductions in extreme portfolio positions.

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Originally published on BenefitsPro.com
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