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By Christine Benz | 02-22-2013 09:00 AM

401(k)s on the 'Right Way' Toward Retirement

Retirement-plan investing patterns have moved closer to what experts say are ideal asset allocations, but pre-retirees remain more inactive than they should be, says Vanguard's John Ameriks.

Christine Benz: Hi, I’m Christine Benz for Morningstar.com. I recently attended the Morningstar Ibbotson Conference and had the chance to sit down with John Ameriks who focuses on retirement research for Vanguard. We discussed the role of equities in 401(k) participants' plans.

John, thank you so much for being here.

John Ameriks: It's great as always to see you Christine.

Benz: So, you have over your career been following trends in terms of how participants allocate their 401(k) plans. Let’s look specifically at how the trends have evolved. How have people changed in terms of their positioning, specifically in relation to their equity holdings?

Ameriks: Sure. That’s a topic that I’ve been looking at as you say for about 15 years. So, the trends there are pretty striking. We've put together data at Vanguard, and others have looked at this. I think over the last 15 to 20 years, you’ve really seen the emergence of a pattern of asset allocation in retirement accounts that lines up much better with what most academics or theorists would say is the right way, or at least in a first-order sense, the right way for asset allocations to look for people saving for retirement.

Generally, that means higher equity allocations for people that are younger and then decreasing equity allocations as people get older and begin to enter retirement. That pattern is actually relatively new in the data. I first observed that kind of pattern about 10 years ago when I was looking at some data from TIAA-CREF at the time. That same pattern has emerged in the Vanguard data that I now look at, and other academics and researchers have seen this elsewhere.

It’s new. It's something that did emerge over this time period, and one of the interesting questions that a lot of folks are asking is, "Is that a permanent feature now of how people save for retirement?" My guess is that it is, and target-date funds, I think, are one big reason for that.

Benz: Well, let’s talk about that target-date or target retirement funds have grown dramatically in popularity over the past decade and over the past five years or so in particular. What role have target-date funds had in shaping people's asset allocations?

Ameriks: It really is all about the default allocation that someone gets when they enter into a retirement plan, and target-date funds now have a structure that reflects that "higher equity allocation when young, lower when older" pattern. The defaults that were used in many retirement plans in the United States 15 and 20 years ago were very, very conservative, and those defaults also had affected the age profile of equity exposure, how much risk people were taking in their plans.

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