Senior members can benefit from personalised asset allocation

Our recent study, conducted in collaboration with experts from Massachusetts Institute of Technology (MIT) Sloan School of Management and Stanford University Graduate School of Business, reveals that as retirement savers age, both their asset allocation preferences and accumulated savings become more varied. This is a summary of the paper, “Age, evolving allocation preferences, and the case for personalized solutions.” We looked at data from T. Rowe Price’s US recordkeeping platform (covering more than 2 million participants) and broader household surveys and found that lower-than-recommended equity allocations are often driven by behavioural frictions—such as inertia and limited investment knowledge—rather than by risk aversion alone.

Economic theory suggests most investors should hold substantial equity positions due to the equity premium, yet actual investor behaviour often diverges from these models. Before target date strategies¹ became prevalent in the U.S., average equity allocations in employer-sponsored retirement plans were low across all age groups, peaking in middle age rather than in youth as theory would predict. This research explores how defaults² and plan design influence investor behaviour, revealing that many individuals simply follow the default option, regardless of their true preferences.

A quasi-experiment comparing members in retirement plans before and after changes in default allocations demonstrates that those automatically enrolled in investment options maintain higher equity allocations, while others who opt in increase their equity exposure more gradually. By focusing on ‘consistent’ investors (those whose choices do not depend on defaults), the authors estimate that true equity preferences are much higher than observed, with most investors preferring significant equity allocation throughout their working lives.

Preferred equity shares align with life-cycle models in the absence of investment barriers

Empirical findings indicate that, absent behavioural frictions, preferred equity allocations follow a declining trajectory with age. In Figure 1, the right panel shows that the preferred share of stocks in the retirement portfolio is high, varies between 60% and 85% and declines with age. This is in line with the traditional models of portfolio choices but in sharp contrast with the observed share of stocks in our data, as shown on the left panel.

These differences between actual investor behaviour and their estimated preferences highlight the impact of various frictions—such as inertia, conservative defaults and limited investment engagement—that may impede optimal stock market participation.

Changing circumstances, changing preferences

The analysis then focuses on consistent investors—those whose choices are independent of defaults—dividing the sample into three age groups: 20–34, 35–49 and 50+. The research finds that the diversity of equity allocation preferences increases with age. Young investors predominantly favour high equity shares, whereas older investors display a much wider range of preferences, with significant numbers at both the conservative and aggressive ends of the spectrum (Figure 2).

This growing heterogeneity is attributed to varied life experiences, changes in employment status, marital status, dependants, health and investment history. Such factors result in a broader dispersion of retirement assets and risk tolerances, further reinforcing the argument for personalised solutions.

Utilising data from the 2022 Survey of Consumer Finances, the paper demonstrates that the distribution of retirement savings widens considerably as individuals age. While some might want to focus on asset protection, others might aim for growth. This diversity in financial circumstances for older members underscores the need for more tailored investment solutions.

Older investors are personalising their allocations

Drawing on T. Rowe Price recordkeeping data from 2019 to 2024, we reviewed how investors in different age groups adjusted their equity allocations. Overall, older investors exhibited a wider range of equity allocation changes, consistent with the notion that diverging preferences for equities and financial circumstances prompt more allocation adjustments (Figure 3).

• Older investors actively adjusted their portfolios more than younger ones. 46% of investors ages 20–34 kept their equity allocation unchanged compared with only 26% of investors age 50+.
• Among those who changed their equity allocations during this period, investors across all age groups tended to increase rather than decrease their equity exposure as they aged.
• The share of investors who increased their equity allocations went up with age. 50% of investors age 50+ increased their equity share compared with just 34% of investors ages 20–34.

This suggests that older individuals are more actively seeking to personalise their portfolios, possibly to compensate for perceived shortfalls in savings or due to greater investment confidence.

Fees and other considerations

The research argues that the benefits of personalisation grow with age, but some practical challenges remain. The success of these solutions depends on member engagement and the willingness to share personal information, which can be affected by privacy concerns. Additionally, personalised products may involve higher fees, necessitating transparent and well‑designed fee structures.

There is also a behavioural risk: Increased personalisation may lead to excessive monitoring and trading, which can negatively impact returns as documented by Barber and Odean (2001, 2008).

For a successful adoption of personalised investments—whether through tailored default funds or individual financial advice—fee structures must be carefully designed and transparent. Clear communication to explain changes in default investments, their benefits and associated costs is essential. If these challenges are properly addressed, personalised investment strategies could improve retirement outcomes for investors.