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Demographics, Plan Design Influence Participants’ Retirement Portfolio Allocations

We know a majority of U.S. workers (58%) are saving for retirement in a defined contribution-type account. But what, specifically, determines their wealth at retirement? Is it how they invest? Their income? Their education? Their contribution rates? It turns out all of these affect how much savings DC plan participants accumulate over the course of their careers.

Towers Watson looked at patterns in American workers’ asset allocations at three-year intervals (2004, 2007, 2010 and 2013), and determined that investment behaviors in DC plans were influenced by age, net worth, income, risk tolerance, education and financial planning horizon. Plan design is also a key factor.

All-In or All-Out On Equities

In most American households, DC allocations fall at both ends of the spectrum — 15% of investors have zero allocation to equities, while approximately 22% have 100% of their savings in the asset class. However, it seems retirement portfolio diversification has improved over time, as the instance of these extremes declined from 2004 to 2013. Although the financial crisis of 2008 prompted panic selling and equity aversion, it appears DC plans’ increased use of qualified default investment alternatives (QDIAs) has lured more participants back into equities.

There are perils to both extremes. Completely avoiding equities causes investors to miss opportunities for higher returns, and may significantly impede the growth of retirement wealth. Conversely, investing 100% in equities is generally considered unwise, given the risk for large losses, which could be especially detrimental to workers relying solely on DC accounts to save for retirement. Experts generally suggest an asset allocation that reflects risk tolerance, economic situation, retirement plan provisions and other demographics, according to Towers Watson.

Other Factors Impact Asset Allocation

Age plays a role, too. Equity allocations are lower among older workers. Just 26% of 65-to-74-year-olds allocate 75% or more of their retirement savings to equities, compared to 37% for 25-to-34-year-olds. This trend is consistent with life-cycle financial advice, which encourages investors to reduce equity allocations as they age. It’s also in line with target date funds’ (TDFs) increasing popularity as QDIAs in recent years. The number of DC plans offering TDFs as the default option rose from 64% to 86% in 2014. TDFs automatically reduce equity exposure as investors near retirement.


Better-educated households and those with longer financial planning horizons are more likely to have heftier equity allocations as well. So are those with higher total net worths. Almost 45% of households with at least a $5 million net worth allocate 75% or more of their retirement savings to equities, compared to 32% of those with net worths less than $50,000. Higher-income households are more apt to invest in equities, too.

Participants who are aware of their plan’s investment options and able to select their own funds also allocate more to equities. Conversely, 33% of households with no discretion over their investment choices have no equity allocation. However, plans that don’t give participants the ability to select their investments may offer more conservative options, preventing them from creating overly risky allocations.

See more of Towers Watsons’ analysis.