Retirement plan participants who hand pick their own mix of investment options are generally exposed to greater risk, due to reduced diversification and a tendency to not automatically adjust their portfolios over time, according to research from The Principal Financial Group.
In analyzing a subset of 2.4 million defined contribution accounts of The Principal, the company compared do-it-for-me participants who use a target-date investment option with do-it-myself participants who select their own allocation and services.
The research found that generally, do-it-myself participants were less diversified by asset class and number of investment options, rarely used automatic rebalancing to meet their investment goals, and at young ages, frequently had much less exposure to equities.
Regarding diversification, the research found that do-it-myself participants are using an average of two to four investment options across the board, compared to the average 15-20 underlying investment options within the typical target-date portfolio.
Equity exposure among do-it-myself investors who are far from retirement tended to differ significantly from the average target-date investor in the same age group, the research found. The average do-it-myself participant born after 1987 had nearly 30 percentage points lower equity exposure (54.7%) within their investment portfolio compared to the 83.95% within a target-date investment option.
The research also found that only 2% of do-it-myself investors elected an automatic rebalancing service.
Approximately 744,000 participants included in the survey were target-date investment options users. About 877,000 were do-it-myself participants, defined as participants with no assets in any target-date investment option made available by The Principal.
Mary Schroeder is a freelancer and writes primarily for Securities Technology Monitor. This article was featured in Financial Planning, a SourceMedia publication.
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