Professionally managed
allocations and the dispersion
of participant portfolios
Vanguard research
The growing use of professionally managed allocations in defined
contribution (DC) plans is reducing the dispersion in portfolio outcomes
among participants. Target-date funds are the dominant type of
professionally managed allocation, but the category also includes
traditional balanced options and managed account advisory services.
Dispersion of returns. From 2007–2012, a period encompassing the
global financial crisis, the median Vanguard participant earned an average
annual total return of 2.3%, equivalent to a cumulative return of just less
than 12%. However, the average annual return ranged from –1.7% per
year at the 5th percentile to 6.3% per year at the 95th percentile, a range
of just more than 8 percentage points.
Investments in target-date funds are subject to the risks of their underlying funds. The year in
the fund name refers to the approximate year (the target date) when an investor in the fund
would retire and leave the workforce. The fund will gradually shift its emphasis from more
aggressive investments to more conservative ones based on its target date. An investment in
target date funds is not guaranteed at any time, including on or after the target date.
Connect with Vanguard > vanguard.com
August 2013
Authors:
John A. Lamancusa
Stephen P. Utkus
Jean A. Young
Professional allocations and returns. The expanded use of professionally
managed allocations is leading to reduced dispersion in participant outcomes.
For participants in a single target-date fund during the 2007–2012 period,
realized average returns ranged from 1.7% per year at the 5th percentile to
3.7% per year at the 95th percentile, a range of 2 percentage points. For
participants in a single balanced fund or in a managed account advisory
service, the difference between the 5th and 95th percentiles was about
2 and 3 percentage points, respectively.
Professional allocations and risk. Risk outcomes are also less dispersed for
participants with professionally managed allocations. Risk levels among singletarget-date fund investors were less than half as variable as risk levels for
participants making their own choices.
Implications. The rapid growth in professionally managed allocations—most
notably, target-date funds, but also traditional balanced options and managed
account advice services—is contributing to a reduction in extreme risk and
return outcomes for participants. It is also gradually mitigating concerns about
the quality of portfolio decision-making within DC plans. Plan sponsors should
consider greater adoption of these strategies to encourage better risk control
and investment discipline in DC participant portfolios. Actions to consider
include: offering target-date funds within the plan’s investment menu, either on
a voluntary or default basis; promoting their use in educational programs;
introducing a managed account advisory service for participants seeking a
customized portfolio strategy; and considering reenrollment into a plan’s
designated default option.
2
Background
This paper continues our research on professionally
managed allocations and their impact on participant
portfolio construction in defined contribution (DC)
plans. Professionally managed allocations are
participant accounts where 100% of the balance
is invested by a professional money manager. A
single target-date fund is the most common type
of professionally managed allocation, but the
category also includes traditional balanced funds
and a managed account advisory service. In effect,
by choosing a professionally managed allocation
(or by being defaulted into one), participants are
delegating the complex task of portfolio construction
to a third-party money manager selected by the
plan sponsor.
As of 2012, 36% of Vanguard participants were
invested in professionally managed allocations, with
a single target-date fund representing the largest
part of that group at 27%. We estimate that more
than half of participants will be in such allocations
within five years, principally because of the growing
use of target-date funds.1 One reason for the
growing interest in professionally managed
allocations is their designation as “qualified default
investment alternatives” under the 2006 Pension
Protection Act. However, voluntary investment in
these options by participants is also an important
factor underlying their expansion.
This paper examines DC participant portfolio
outcomes for the five-year period ended December
31, 2012. We confirm two main findings from our
prior papers on this topic.2 First, in the 2007–2012
period—which includes the years of the global
financial crisis—the typical participant earned a small
but positive investment return. (When contributions
are also included, median account balances grew by
double-digit rates.3) However, returns were highly
dispersed, with the difference between the 5th and
95th percentile spanning some 8 percentage points
per year.
1
2
3
4
Second, risk and return outcomes for participants in
professionally managed allocations were substantially
less dispersed than for participants making their own
choices. We believe that this reduction in dispersion
of outcomes is attractive to plan fiduciaries, as it
demonstrates both improved investment discipline
and risk control in participant portfolios. This result
also is gradually mitigating concerns about the quality
of investment choices being made by inexperienced
plan participants.
After a brief review of methodology and the market
environment, the paper presents several measures
of participant-realized returns and risk characteristics
over various periods.
Caveats
As in our prior papers, there are several caveats
to consider when reviewing our results. First,
realized total returns reflect investment results for
a specific period, and are conditional on the market
and investment conditions prevailing during that
time. The three-year and five-year periods ended
December 31, 2012, were quite different in terms
of the realized equity risk premium.4 Second, total
returns over the period reflect the effect of several
portfolio characteristics, including asset allocation,
sub-asset allocation, fund selection, rebalancing, and
fees. Given the range of factors influencing portfolio
outcomes, results across participants, and results
across different strategies, should be expected to
vary over future periods.
Vanguard, 2013.
Utkus and Bapat, 2011; Utkus and Bapat, 2012.
Vanguard, 2013.
The equity risk premium here is defined as is the difference between the return on stocks and the return on government or high-grade bonds.
3
Methodology
Market environment
Our data is drawn from Vanguard’s recordkeeping
systems encompassing more than 3 million DC plan
participants. Total returns were calculated monthly
for each participant account over the 60 months
ended in December 2012.5 Total returns reflect
investment performance only, and do not include
the effect of ongoing contributions. Total returns
are net of all fees and expenses—including
investment expenses of the fund options held
by the participants, as well as any separate
account-based recordkeeping charges (such
as per capita recordkeeping fees).
During the 2007–2012 period, global stock markets
at first fell precipitously during the 2008–2009 global
financial crisis (Figure 1). Stock prices subsequently
recovered, and by year-end 2012, U.S. stock
investments were almost 12% higher than the level
at year-end 2007 (as calculated on a total return
basis, including reinvested dividends). International
stocks improved but remained more than 10%
below their December 2007 level. Bond investments
rose steadily due to both reinvested interest income
and rising bond prices (due to falling interest rates
during the period).
When presenting one-, three-, and five-year returns,
we utilize a dataset of all participants with
corresponding one-, three-, or five-year account
histories. This data set includes 2.99 million
participant accounts with a one-year history, 2.34
million participants with a three-year history, and
1.58 million participants with a five-year history.6
As a result, average annual returns were quite
different during the three- and five-year periods
ended December 31, 2012 (Figure 2). During the
five-year period, U.S. stocks returned 2.27% per year
while U.S. bonds returned 5.99%—a negative U.S.
equity risk premium of 3.72% per year. During the
three-year period, U.S. stocks gained 11.34%
compared with 6.26% for U.S. bonds, a positive
equity risk premium of 5.08%.
Also, company stock as a portfolio holding creates
a higher return volatility. The most extreme risk and
return outcomes—either negative or positive—are
typically associated with concentrated company
stock positions. Just less than 10% of the five-year
data set includes participants with a concentrated
position in employer securities—defined here as a
position in company stock that exceeds 20% of the
participant’s account balance. Because participants
with concentrated holdings are only a small portion
of the sample, their results are included within the
totals for all participants.
U.S. bonds offered the highest cumulative return
during the five-year period, with a dollar at the
beginning of the period growing to $1.34. A dollar
invested in U.S. stocks grew to only $1.12, while
$1.00 invested in international stocks fell to $0.86
during the 2007–2012 period. Three-year cumulative
returns for U.S. stocks were much higher than for
U.S. bonds.
5 Total returns are calculated for Vanguard participant portfolios from cash flow to cash flow, and then linked, in accordance with global investment
performance standards.
6 One- and three-year returns are not materially different if they are presented only for the five-year panel of 1.58 million participants. Presenting returns for
only the five-year panel leads to an inherent bias in the data, as it reports on results only for participants with five years or more of plan tenure.
4
Figure 1.
Market performance, 2007–2012
Cumulative total return for select market indexes
Index value
160
100
40
Dec–07
Jun–08
Treasury bills
Dec–08
U.S. bonds
Jun–09
Dec–09
U.S. stocks
Jun–10
Dec–10
Jun–11
Dec–11
Jun–12
Dec–12
International stocks
Note: Indexes represented by the following benchmarks: Cash reserves—Citigroup T-bill Index; U.S. bonds—Barclays U.S. Aggregate Bond Index;
U.S. stocks— MSCI U.S. Broad Market Index; and international stocks—MSCI All Country World Index ex-US Index. All values set at 100 as of
month-end December 2007.
Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment,
as you cannot invest directly in an index.
Sources: Citigroup, Barclays, MSCI.
Figure 2.
Market returns and volatility
For the period ended December 31, 2012
Annualized
total returns
Asset class Index
CumulativeAnnualized
total returns
volatility*
1 35 135
3660
yearyears years
yearyears years monthsmonths
Cash reserves
Citigroup T-bill Index
0.09%
0.08% 0.44%
0.1%
U.S. bonds
Barclays U.S.
Aggregate Bond Index
0.3%
4.32
6.26
5.99
4.3
20.0
U.S. stocks
MSCI U.S. Broad
Market Index
16.44
11.34
2.27
16.4
International stocks
MSCI All Country
World Index ex-US Index
16.83
3.87
–2.89
16.8
2.2%
0.0%
0.2%
33.8
2.5
3.5
38.0
11.9
16.0
19.7
12.1
–13.7
19.5
24.3
Note: Indexes represented by the following benchmarks: Cash reserves—Citigroup T-bill Index; U.S. bonds—Barclays U.S. Aggregate Bond Index; U.S. stocks—MSCI
U.S. Broad Market Index; and international stocks—MSCI All Country World Index ex-US Index.
* Standard deviation of monthly returns over the 36- or 60-month period ended December 31, 2012.
Sources: Citigroup, Barclays, MSCI, Vanguard calculations.
5
Participant total returns
The average Vanguard DC plan participant earned an
average annual return of 2.3% and a cumulative
return of 11.9% over the 2007–2012 period (Figure
3). In effect, for the average participant, investment
results alone boosted retirement wealth by just less
than12%.
Figure 3.
Defined contribution plan participants, for the period ended
December 31, 2012
30%
25.1%
During the three-year period ended 2012, the
average participant realized an average annual return
of 7.8% and a cumulative three-year return of
25.1%, reflecting the sharp increase in stock prices
over the period. On a one-year basis, the average
participant earned 12.4% during 2012.
Dispersion of returns
One of the features of participant-constructed
portfolios is the tendency of many participants to
adopt unconventional or even extreme investment
allocations. Some participants may invest their entire
portfolio in equities, while others invest exclusively
in low-risk assets, such as money market or stable
value funds. Participant portfolios may also be
concentrated in a single fund or management style,
in a specialty asset class, or in company stock. As a
result, participant total returns tend to be dispersed
or distributed over a wide range.
Over the five-year period, while the average
participant gained 2.3% per year, a participant at
the 5th percentile earned –1.7% per year, while
a participant at the 95th percentile gained 6.3%
per year—a difference of 8 percentage points per
year (Figure 4). On a cumulative basis, a $1.00
investment fell to $0.92 for a participant at the
5th percentile, but rose to $1.36 for a participant
at the 95th percentile.
Similarly, over a three-year period, the 5th percentile
participant gained 1.6% per year, while the 95th
percentile participant rose 11.5% per year. On a
cumulative basis, the 5th percentile investor saw
a $1.00 investment grow to $1.05, while the 95th
percentile investor saw a $1.00 investment grow
to $1.39.
These statistics illustrate the wide variation in
portfolio construction across participants. They also
demonstrate that during the five- and three- year
periods, very few participants had a negative return.
In particular, we found that only 1 in 10 participants
had a negative five-year return and only 1 in 100 had
a negative 3-year return.
6
Participant total returns
12.4%
12.4%
11.9%
7.8%
2.3%
0%
Average annual
total returns
1 year
3 years
Average cumulative
total returns
5 years
Note: Includes 2,991,291 participants for the 1-year period; 2,337,819 participants
for the 3-year period; and 1,583,839 participants for the 5-year period. Past
performance is not a guarantee of future results.
Source: Vanguard, 2013.
Figure 4.
Distribution of participant total returns
Defined contribution plan participants for the period ended
December 31, 2012
20%
17.6%
15.6%
12.4%
11.5%
9.2%
9.2%
7.8%
1.5%
6.8%
6.3%
1.6%
3.3%
2.3%
1.2%
0%
-1.7%
-5%
1 year
3 years
5 years
Reading a box-and-whisker graph: Top of line represents 95th percentile; top of
box, 75th; diamond, average; bottom of box, 25th; and bottom of line, 5th.
Note: Includes 2,991,291 participants for the 1-year period; 2,337,819 participants
for the 3-year period; and 1,583,839 participants for the 5-year period.
Source: Vanguard, 2013.
Effect of professionally managed allocations
Participant portfolio strategies in DC plans are being
reshaped by the growth of professionally managed
allocations—including target-date funds, traditional
balanced funds, and managed account advisory
services. Target-date funds are being offered within
plans to streamline portfolio choice by participants;
they are also a common default fund for automatic
enrollment. Traditional balanced funds, whether
offered on a stand-alone basis or as part of a riskbased series of life-cycle funds, play a similar role in
a smaller fraction of plans. Managed account
advisory services are also being increasingly offered
within plans, typically on a voluntary choice basis.
Managed accounts provide customized portfolio
recommendations, typically for an additional fee,
with a third-party advisor taking discretionary control
over the participant’s account.
For each type of professionally managed allocation,
we separately estimated portfolio return and risk
characteristics over three- and five-year periods
ended December 31, 2012. Under our approach, a
participant in a particular strategy (i.e., in a singletarget-date or balanced fund or in the managed
account service) had to maintain this strategy over
the full three- or five-year period. Participants in
these three types of allocations were compared with
all other participants—in essence, participants
making their own portfolio construction decisions.7
Examining returns over the five-year period,
outcomes for single-target-date investors ranged
from 1.7% per year for the 5th percentile to 3.7%
for the 95th percentile, a difference of approximately
2 percentage points (Figure 5). For the single
balanced fund and managed account participants,
the 5th-to-95th percentile difference was
approximately 2 and 3 percentage points. (Singlebalanced-fund investors also had generally higher
returns over this period because of their
larger fixed income exposure.)
Figure 5.
Distribution of five-year returns by strategy
Defined contribution plan participants, five-year annualized total
returns for the period ended December 31, 2012
7.0%
6.4%
4.3%
3.7%
2.3%
2.2%
1.7%
3.5%
3.3%
3.1%
3.6%
2.3%
2.4%
3.3%
2.3%
1.9%
1.7%
1.2%
1.2%
0.2%
0.0%
-1.9%
-3.0%
Single
target-date
fund
Single
balanced
fund
Managed
account
All other
participants
Reading a box-and-whisker graph: Top of line represents 95th percentile;
top of box, 75th; diamond, average; bottom of box, 25th; and bottom of line, 5th.
Note: For the five-year period, includes 24,889 single target-date fund
participants, 35,992 single balanced fund participants, 28,848 managed account
participants, and 1,494,110 all other participants, for a total sample of 1,583,839
participants.
Source: Vanguard, 2013.
By comparison, among all other participants, those
making choices on their own realized returns ranged
from –1.9% per year for the 5th percentile to 6.4%
for the 95th percentile, a difference of more than
8 percentage points. (Keep in mind that these
differences would be wider in a period with strong
equity returns.)
7 Over the three-year period, the sample size includes 90,171 single-target-date fund participants, 60,892 balanced fund participants, 66,822 managed
account advisory service participants, and 2,119,934 all other participants. Over the five-year period, the sample size includes 24,889 single-target-date
fund participants, 35,992 balanced fund participants, 28,848 managed account advisory service participants, and 1,494,110 all other participants.
7
Dispersion of outcomes over three years
Differences among participant portfolios are
particularly apparent when examining both return
and risk outcomes in scatterplots. For ease in
presentation, we created a random sample of
approximately 1,000 participants for each group
of investors.8
During the 2009–2012 period, which was
characterized by a positive equity risk premium,
outcomes for single-target-date investors were
distributed among major market indexes (Figure 6,
Panel A). These results are consistent with the fact
that most of the target-date portfolios in our sample
are a specific combination of indexed U.S. equities,
international equities, and U.S. bonds. In the targetdate scatterplot (in Panel A), younger participants
(represented by blue dots and in long-dated
portfolios) are to the right of the chart; older
participants (represented by purple dots and in
near-dated portfolios) are to the left.
The figure includes just less than 1,000 observations,
although there appear to be far fewer. The reason
is that while there are many observations in our
sample, they are all 100% invested in a limited set
of target-date portfolios, which means that portfolio
outcomes are also limited. For example, if a plan
offered 12 target-date options, then 1,000
participants invested solely in a single target-date
fund would have 12 outcomes, not 1,000.
The results for single balanced fund investors reflect
the fact that most balanced funds have similar equity
allocations, typically around 50% to 60% of assets
(Figure 6, Panel B). Again, although there are nearly
1,000 participants in the scatterplot, their portfolios
are confined to the investment results of the limited
number of balanced funds offered by the plans in
our data set.
Managed account investors are more dispersed. A
managed advice service varies asset allocation not
only by age but also other factors such as risk
tolerance and prior holdings (Figure 6, Panel C). We
refer to this result as the “cloud of customization.”
Managed account portfolios also include active
manager risk and, in some cases, limited exposure
to company stock, contributing to the “cloud” effect.
Some participants may also incorporate their other
assets in the service—in which case the plan results
shown here may be tailored to fit these other
holdings. The managed account service may also
consider other individual factors such as other
benefit plans and plan contribution rates. Again,
younger participants represented by blue dots cluster
to the right of the “cloud,” and older participants
represented by purple dots cluster to the left of
the “cloud.”
The greatest dispersion of risk and return outcomes
is among all other participants (Figure 6, Panel D).
Here age groups are scattered throughout the chart.
Why do we see such dispersed portfolio results?
One reason is differences in equity exposure.
Outcomes on the far left are for portfolios invested
exclusively in conservative options such as money
market and stable value funds; outcomes on the far
right represent all-equity portfolios. Other reasons for
the dispersion of results include asset allocations
overweighted to specific sub-asset classes; active
manager risk exposure; concentrated positions in
employer stock; trading and rebalancing activity
(or a lack thereof) over time; and differences in
recordkeeping and investment fees across plans
and fund options.
8 Because certain types of recordkeeping processes contribute to erroneous and extreme returns, both positive and negative, we eliminated half a
percentage point from the top and bottom of both the risk and return distributions—i.e., a total tail reduction of 2%—leaving 980 observations in
each figure.
8
Figure 6.
Risk and return characteristics, 2009–2012
Defined contribution plan participants for the three-year period ended December 31, 2012
B. Single balanced fund participants
A. Single-target-date participants
20%
Three-year annualized total return
Three-year annualized total return
20%
U.S.
stocks
Non-U.S.
stocks
U.S.
bonds
0%
–5%
0%
10%
20%
U.S.
stocks
0%
–5%
30%
Non-U.S.
stocks
U.S.
bonds
0%
10%
Three-year annualized standard deviation
20%
30%
Three-year annualized standard deviation
C. Managed account participants
D. All other participants
20%
20%
Three-year annualized total return
Three-year annualized total return
U.S.
stocks
U.S.
stocks
U.S.
bonds
Non-U.S.
stocks
0%
–5%
0%
10%
20%
30%
Three-year annualized standard deviation
Younger than 35
Ages 35 to 55
U.S.
bonds
Non-U.S.
stocks
0%
–5%
0%
10%
20%
30%
Three-year annualized standard deviation
Older than 55
Note: Includes 1,000 random samples of participant accounts drawn from respective samples. Excludes 0.5% top and 0.5% bottom outliers for both risk
and return, for a net sample of 980 observations. Past performance is not a guarantee of future results.
Source: Vanguard, 2013.
9
Dispersion of outcomes over five years
In contrast to the upward-sloping results for the
three-year period, outcomes for the full five-year
period, 2007–2012, are generally downward-sloping,
reflecting the negative equity risk premium prevailing
during that period.
Even in this quite different market environment,
similar patterns hold. Single-target-date fund holders
(Figure 7, Panel A) span the risk/return spectrum,
reflecting the age-based pattern of target-date
investing. They are situated among major market
indexes in a disciplined way. Single balanced fund
investors (Figure 7, Panel B) are again clustered in
a smaller group, reflecting the narrower range of
allocations for those funds.
The results for managed account advisory
participants (Figure 7, Panel C) again demonstrate
the “cloud of customization.” During this period, the
data points at the extremes of the “cloud” represent
the effects of customization of as well as sponsor
fund selection. At the far left are accounts
dominated by fixed income holdings, while at
the far right are accounts with large positions in
active international equities.
10 Finally, the results for all other participants reflect
yet again the greater dispersion in outcomes for
participants making their own allocation choices
(Figure 7, Panel D).
Over time, the dispersion of all participant outcomes
is declining as a result of the rapid growth in the
use of target-date funds. Traditional balanced fund
options and managed account advisory services are
also expected to continue to grow, although at a
slower pace. Yet for plan fiduciaries, these results
underscore the wide dispersion in results that exists
when participants make their own choices. An
important question for fiduciaries to consider is to
what extent such dispersion reasonably reflects
participant desires for portfolio customization—or
reflects a lack of skill at portfolio construction.
Figure 7.
Risk and return characteristics, 2007–2012
Defined contribution plan participants for the five-year period ended December 31, 2012
B. Single balanced fund participants
A. Single-target-date participants
20%
Five-year annualized total return
Five-year annualized total return
20%
U.S.
bonds
U.S.
stocks
0%
Non-U.S.
stocks
–5%
0%
10%
20%
U.S.
bonds
U.S.
stocks
0%
Non-U.S.
stocks
–5%
30%
0%
Five-year annualized standard deviation
10%
C. Managed account participants
20%
U.S.
stocks
Five-year annualized total return
Five-year annualized total return
U.S.
bonds
U.S.
bonds
U.S.
stocks
0%
Non-U.S.
stocks
0%
10%
20%
30%
Five-year annualized standard deviation
Younger than 35
30%
D. All other participants
20%
–5%
20%
Five-year annualized standard deviation
Ages 35 to 55
0%
Non-U.S.
stocks
–5%
0%
10%
20%
30%
Five-year annualized standard deviation
Older than 55
Note: Includes 1,000 random samples of participant accounts drawn from respective samples. Excludes 0.5% top and 0.5% bottom outliers for both risk
and return, for a net sample of 980 observations. Past performance is not a guarantee of future results.
Source: Vanguard, 2013.
11
Risk dispersion measures
We also calculated a series of metrics examining
participant risk exposures and the dispersion of
those risk exposures across participants. The mean
volatility level (Figure 8, Panel A) of participants in
our different groups varies predictably. The average
risk level for the single balanced fund options was
lowest among the four groups, at 8% per year over
three years and 11% per year over five years.
Average risk levels were somewhat higher for
managed account and all other participants, at 12%
or 15% depending on the period. They were highest
among single-target-date investors, at 13% or 16%
depending on the period, because young investors
with higher equity allocations dominate this group.
How much do risk levels vary from participant to
participant? The standard deviation of portfolio risk
levels (Figure 8, Panel B) measures the dispersion
of risk across participants in a given group. Among
professionally managed allocations, the standard
deviation in the value of risk levels was 2% or 3%
over each period. However, among participants
making choices on their own, the standard deviation
was 6%—three times as high as the professionally
managed allocations.
The coefficient of variation (Figure 8, Panel C)
scales the standard deviation across participants
by the mean risk level and permits normalized
comparisons across our groups of investors. Over
the three- and five-year periods, the coefficient of
variation for all other participants is nearly three
times that of single-target-date investors. In other
words, participants constructing portfolios on their
own tend to choose risk levels that are three times
as extreme as those selected by a target-date fund
manager. These higher risk levels reflect the factors
noted earlier in this report—more extreme asset
allocations, differences in sub-asset class
and fund selection, concentrated fund or single
stock risk, plus the effects of rebalancing, fees,
and other factors.
12 Figure 8.
Risk and risk dispersion measures
2009–20122007–2012
A. Mean portfolio risk
Single target-date fund
Balanced fund
13%
8
16%
11
Managed account advisory service
12
15
All other participants
11
15
B. Standard deviation of portfolio risk
Single target-date fund
3%
3%
Balanced fund
2
2
Managed account advisory service
2
2
All other participants
6
6
C. Coefficient of variation of portfolio risk*
Single target-date fund
20%
17%
Balanced fund
24
19
Managed account advisory service
17
16
All other participants
49
43
* The standard deviation of portfolio risk (Panel B) divided by its mean (Panel A).
Source: Vanguard, 2012.
Implications
One of the distinctive characteristics of participant
portfolios is the tendency for self-directed portfolios
to be highly dispersed in terms of both risk and
return. By comparison, professionally managed
allocations result in a narrower range of investment
outcomes, consistent with a more disciplined
investment approach. Target-date funds are the
dominant type of professionally managed allocations,
but the category also includes traditional balanced
funds and managed account advisory services.
For plan fiduciaries, the question is whether such
dispersed outcomes are an inevitable result of
participants’ desires to customize their portfolios—
or whether participants appear to lack skill at
portfolio construction. Sponsors concerned about
the dispersion of portfolio outcomes will want to
consider a number of strategies: offering target-date
funds (or traditional balanced funds) on a default or
voluntary basis within the plan investment menu;
offering a managed account advisory service and
promoting its use; and using the strategy of
reenrollment into a qualified default investment
alternative (QDIA) as a way to make rapid changes
to participant investment holdings.9
More broadly, the growing use of target-date funds
and other professionally managed allocations is
changing the investment decision-making within DC
plans. Participants are increasingly not making
complex investment choices on their own, but are
instead delegating this responsibility back to the
employer—and, in particular, to the employerdesignated money manager or third-party advice
provider. Such a development is resulting in
improved patterns of diversification in participant
portfolios, and is gradually mitigating concerns about
errors in decision-making by inexperienced plan
participants.
9 See Vanguard, 2012b, and Mottola and Utkus, 2009.
13
References
Utkus, Stephen P. and Shantanu Bapat, 2011.
Participants during the financial crisis: Total returns
2005–2010. Vanguard Center for Retirement
Research, Malvern, PA. https://institutional.vanguard.
com/VGApp/iip/site/institutional/researchcommentary/
article/InvResDuringCrisis
Utkus, Stephen P. and Shantanu Bapat, 2012.
Target-date funds and the dispersion of participant
portfolios. Vanguard Center for Retirement Research,
Malvern, PA. https://institutional.vanguard.com/iam/
pdf/DISPP.pdf
Utkus, Stephen P. and Gary R. Mottola, 2009.
Reenrollment and target-date funds: A case study
in portfolio reconstruction. Vanguard Center for
Retirement Research, Malvern, PA. https://
institutional.vanguard.com/VGApp/iip/site/institutional/
researchcommentary/article/RetResTDF.
Vanguard, 2012. Improving plan diversification
through reenrollment in a QDIA. Vanguard Strategic
Retirement Consulting, Malvern, PA. https://
institutional.vanguard.com/VGApp/iip/site/institutional/
researchcommentary/article/InvComReEnrollQDIA.
Vanguard, 2013. How America Saves 2013: A report
on Vanguard 2012 defined contribution plan data.
Vanguard Center for Retirement Research, Malvern,
PA. https://institutional.vanguard.com/iam/pdf/
HAS13.pdf.
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