Large-cap U.S. equity represents almost a third of all the money in public defined-contribution plans — an outsize allocation that is far larger than the allocation in 401(k)s.
Although public DC plans often have unwieldy investment menus that can overwhelm participants and effectively keep them from choosing any option, two sub-asset classes account for about half the money in those plans, according to a recent report from the Public Retirement Research Lab, a collaboration between the Employee Benefit Research Institute and the National Association of Government Defined Contribution Administrators.
Those two categories, U.S. large-cap equity and stable value, account for 32.2% and 18.6% of assets in public DC plans, respectively, the report found.
The findings could reveal a lot about how plan design affects the ways participants invest. Government DC plans, or 457s, for example, have commonly used multiple record keepers, each of which can offer participants a dizzying number of investment options. That has started to change, with more plans opting for a smaller number of record keepers and defaulting participants to target-date funds.
Looking at the data by participants, rather than plan assets, just over 17% of those in public DC plans are invested in large-cap U.S. equity, or a little over half the percentage by plan assets. Over 35% of participants are invested in target-date funds, while just 15% of plan assets are in those products, according to the report. That likely indicates that a much bigger share of young workers, generally with smaller account balances, are defaulted into target dates.
More than 40% of public DC participants in their 20s are invested in target-date funds, compared with less than 10% of people 50 and older, according to the report. Just 15% of those in their 20s hold large-cap U.S. equity, while that figure is higher than 30% for those 50 and older.
However, nearly 18% of participants hold stable value, or about the same as the percentage of assets in that category.
In 401(k) plans, by comparison, about 24% of assets were held in target-date funds in 2017, according to the most recent data from the Investment Company Institute and BrightScope. About 43% of assets were in equity funds of all types.
The report also highlights a big difference between public and private-sector plans — the youngest workers in the government plans allocate very little to equity compared to those in other plan types. Among those ages 20 to 24, for example, just over 20% of assets in 457 plans are invested in U.S. stock funds, compared with about 65% for those in that age group in 401(k)s, more than 80% for those in 403(b)s and about 90% for people in 401(a) plans, figures from the report show.
While the proportion of assets in equity generally decreases over time for the three other plan types, it increases dramatically for those in public DC plans until age 35, where it plateaus at about 70% before starting to fall after age 50.
The researchers also found a big difference in how people allocate assets, depending on whether the plan is their primary one or supplements a government pension. Those with supplemental plans invest much less in equity — about 40% at ages 20 to 24, compared with 90% among those in primary plans.
Further, the report found that women in public DC plans are more likely than men to invest in target-date funds and fixed income but less likely to invest in equity.
The researchers did not find data to explain the high concentration of money in public DC plans in large-cap U.S. equity, but they said that private-sector studies “have illuminated trends such as too many investment options causing confusion and participant inertia toward default investments.” But they noted, “Given the variety of retirement system structures in the public sector, any one cause is unlikely to have a universal application.”
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