Morningstar - Q3 2020 - 29

EXHIBIT 1

Likelihood of Participant-Directed Portfolio Changes

change than self-directed participants, at 22.7%
and 15.5%, respectively.

Any
Change

Change in
Allocations
Plus
Fund +/-

Change in
Allocations
Without
Fund +/-

Fund +/-
Without
Change in
Allocations

Other
Change in
Balances

Sample Size
(No. of
Participants)

Defaulted Into Managed Account

1.3

N/A

43,282

Opted In to Managed Account

1.7

N/A

21,909

Pure Target-Date Fund

2.1

1.0

0.1

1.0

0.0

265,841

Fully Delegated

2.0

1.1

0.1

0.8

0.0

331,032

Mixed Target-Date Fund

22.7

1.9

0.3

13.4

7.1

42,655

Self-Directed

15.5

5.1

3.0

5.0

2.4

243,689

Partly/Fully Self-Directed

16.6

4.6

2.6

6.3

3.1

286,344

8.7

2.7

1.2

3.3

1.5

617,376

All Participants
Source: Morningstar.

type of change they made to their fund allocations
or fund balances based on participant
classifications on Dec. 31 and March 31. We
consider four types of changes:
1 Changes in fund allocations that are accompanied

by fund additions and removals.
2 Changes in fund allocations that are not

accompanied by fund additions and removals.
3 Fund additions and removals that are not

accompanied by changes in fund allocations.
4 Fund exchanges between the existing set of funds.

Note that for managed-account participants,
"any change" indicates the fraction of
participants who stop using the managedaccount product.
Overall, we find that 8.7% of participants made
changes to their portfolios during the first quarter
of 2020. This is similar to the annual level
of trading typically exhibited by participants in
other settings. For example, Vanguard found
that only 7% of participants initiated any trades
within their accounts in 2019.
There are notable differences in the likelihood
of a portfolio change based on whether the
participant delegated portfolio management or is
self-directing. Only 2% of participants who

fully delegated portfolio management made any
changes to their allocations or fund balances
versus 16.6% of participants who did not fully
delegate portfolio management.
For delegated participants, the likelihood of
any portfolio change ranges from 1.3%
for participants defaulted into managed accounts
to 2.1% for participants investing entirely in
a single target-date fund. Given the plausibly lower
sophistication levels of the typical delegated
participant, this inertia is likely to reflect
high levels of trust in the managed portfolio or
target-date fund, low levels of attention to
financial markets, or both. The fact that
the likelihood of any portfolio change is lower
for the managed-account products than
for pure target-date fund participants suggests
slightly higher levels of trust in a customized
portfolio than in a target-date fund. Nevertheless,
the fact that the vast majority of target-date
participants stayed the course during
a quarter of unprecedented market volatility
suggests the funds' widespread adoption
as default investment options continues to
benefit participants.
Among participants not fully delegating
portfolio management, there is significant variation
in the types of changes being made, with
participants defined as mixed target-date fund
investors being more likely to make a

Separately, we ran a series of regressions and
found that the likelihood of making any
changes tends to increase with account balance,
salary, deferral rate, Roth account balances, and
rollover balances, all of which are likely to be
positively correlated with the level of participant
sophistication. Additionally, after controlling
for these participant characteristics, we found
that managed-account participants are less
likely to make any portfolio changes than pure
target-date fund participants. These estimates
suggest that managed accounts may be even more
effective than target-date funds in allowing
participants to weather volatile markets.
The fact that the estimates are quite similar for
those who are defaulted into managed
accounts and those who opt in to these products
helps to allay concerns that the differences
are driven by self-selection into managed accounts.
(In none of the specifications can we reject the
hypothesis that participants defaulted into
managed accounts are more or less likely to make
portfolio changes than participants opting in
to managed accounts.)
Everything else equal, we also find that selfdirected and mixed target-date fund participants
are much more likely than pure target-date
fund participants to make portfolio changes, as
shown in EXHIB IT 1 . In other words, while it
is true that less-sophisticated participants are
more likely to delegate their portfolio management
to a target-date fund or managed account,
it is also true that these delegated participants
are less likely to make portfolio changes
than similar participants who are managing their
own portfolios.
Magnitude of Changes
Next, we focused on the extent of the portfolio
adjustments made by participants who
changed their allocations during the first quarter.
Because the vast majority of portfolio changes
were made by self-directing participants,
we focused our remaining analysis on the 16.6%
of self-directing participants who made a
portfolio change.

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