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Portfolio > Portfolio Construction

More Retirement Investors Are Diversifying Their Portfolios: Study

By Jeff Berman

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A growing number of U.S. workers are diversifying their retirement investments, while participation in defined contribution plans keeps increasing also, according to new research released by Principal Financial Group.

Baby boomers, Gen Xers and millennials are all increasingly diversifying their retirement portfolios, the latest “Driving Plan Health” report conducted by Wells Fargo Institutional Retirement and Trust, which was acquired by Principal in 2019, shows.

However, millennials tend to have the most diversified investments of the three generations, followed by Gen X and baby boomers.

The study defined diversified investment solutions as allocations toward an all-in-one choice, including target date funds, managed accounts or model portfolios, or account balances in at least two equity and one fixed income asset class, the firm noted.

Eighty-three percent of millennials invested in defined contribution plans with services by Wells Fargo Institutional Retirement and Trust were invested in diversified portfolios in 2018, up from 77% in 2013, according to the report. In comparison, 80% of Gen Xers were in these portfolios in 2018 vs. 74% in 2013 and 78% of boomers vs. 72% in 2013, it said.

Of those diversified, 63% of millennials had 100% of their funds in a diversified investment solution compared with only 45% of boomers, Principal said.

Boomers, however, are more active in workplace retirement programs than millennials, Principal said. According to the report, 47% of boomers are contributing to a retirement savings account vs. only 30% of millennials and 37% of Gen Xers.

Over the past five years, meanwhile, participation in a defined contribution plan has grown faster than other measures of plan health, Principal said. Participation in a defined contribution plan has grown 12% from 2013, with 65% of individuals taking part in a workplace defined contribution plan, it said.

However, the report indicated that all three key retirement plan health measures — participation, contributions and diversification — made “significant gains” over the past five years. Millennial workers especially seem to be quickly catching up to boomers when it comes to contribution and participation rates, Principal said.

“Seeing such significant growth among these critical plan health measures tells us more people depend on defined contribution plans to save for their retirement,” according to Renee Schaaf, president of retirement and income solutions at Principal. “With millennials looking to replace more of their retirement income with their DC plan accounts, we have a tremendous opportunity and obligation to help them save enough so they can have enough in retirement,” she said in a statement.

“The biggest surprise we saw in the research was the disconnect between the amount of people who want to use their 401(k) account as an income stream in retirement versus the very small amount who actually do,” Schaaf told ThinkAdvisor Friday.

“As 401(k)s continue to make up a larger portion of people’s retirement portfolio, it will be increasingly important to ensure they have the tools and education to make that money last a lifetime. That’s why we’re committed to helping people not just to retirement, but through retirement,” she added.

Millennials are on track to have more retirement income than prior generations, Principal said. While pre-retirees save more currently, millennial workers in the study significantly outpaced their predecessors when looking at retirement income replacement projections, it said. The firm estimated that pre-retirees will replace 47% of their income on average, while millennials will be positioned to replace 86% of their income.

One major factor driving that trend: Many millennials are gaining access to defined contribution plans earlier in their working life than those older than 50, identified in the study as pre-retirees, Principal said.

Other factors: Almost a third of pre-retirees are not participating in their 401(k) plans, and of those that do, less than 50% save at least 10% of their income, including employer match. Those nearing retirement may also be banking on other primary retirement income sources, according to the firm.

Nineteen percent of pre-retirees will depend on a defined benefit plan and 38% on Social Security as their primary source of income in retirement, according to Principal. On the other hand, 46% of millennials expect their defined contribution plan to serve as their main source of income in retirement vs. only 25% of boomers, it said.

“Overall, we’re encouraged by the positive trends uncovered in this year’s report,” Schaaf said. “Increases in participation and contribution rates combined with the passage of the Secure Act should help drive momentum over the next five years,” she predicted.

The 2019 “Driving Plan Health” report examined 4 million eligible participants in about 1,900 defined contribution plans with services by Wells Fargo Institutional Retirement and Trust, as well as terminated participants who retained a balance in those plans, Principal said. All data was as of Dec. 31. This year’s report expanded its purview to look at how to help participants succeed not just in getting to retirement but creating an income stream in retirement, it noted.

— Check out Secure Act’s New Retirement Plans: MEPs, ARPs & PEPs on ThinkAdvisor.

Jeff Berman

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