How New Laws Reshaped Stock Market Participation

Over the past two decades, middle-class Americans have quietly changed how they invest. Using detailed account-level data from millions of workers between 2006 and 2018, this paper shows that the share of investable wealth held in stocks has risen—and become systematically linked to age. The driving force? The Pension Protection Act (PPA), which made target date funds (TDFs) the default option in retirement plans. Default design, not investor education or income growth, is reshaping equity exposure across the lifecycle.

Household Portfolios and Retirement Saving over the Life Cycle

• Hu and Ma
• Journal of Finance, 2021
• A version of this paper can be found here
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Key Academic Insights

Equity exposure rose 10% since the 1990s
Compared with investors in the 1990s, U.S. middle-class households now hold a substantially larger fraction of their investable wealth in equities. The increase is not just about market returns—it reflects structural changes in retirement plan design and default investment options.

The Pension Protection Act reshaped investor behavior
The PPA allowed target date funds to become default options in employer-sponsored retirement plans. Workers who joined firms after TDFs became the default invested differently from earlier cohorts: younger workers held more in stocks, while older workers held less, exactly matching TDF glidepaths.

Defaults work through allocation, not savings rates
Interestingly, contribution rates—how much employees save—didn’t change meaningfully after the PPA. The shift was purely about where money went, not how much was saved. This suggests that behavioral nudges influence portfolio composition more than saving behavior.

Age dependence replaced uniform exposure
Before the PPA, equity shares were roughly similar across ages. After TDF adoption, asset allocation became sharply age-dependent. Younger workers are now far more exposed to equities, while older workers systematically de-risk. The policy effectively automated lifecycle investing for the middle class.

Practical Applications for Investment Advisors

Lifecycle design is the new benchmark
Advisors managing retirement portfolios must recognize that many investors now expect equity exposure to decline mechanically with age. Aligning advice and communication with TDF-style frameworks helps clients interpret their default positions more clearly.

Defaults matter more than intentions
Behavioral inertia means investors often “stick with the default.” Advisors should ensure that these defaults reflect clients’ actual goals and risk tolerance—especially for those who roll assets out of employer plans.

Monitor the post-default generation gap
Younger workers entering the market after 2006 are significantly more equity-heavy than prior cohorts. Advisors working with multigenerational families or 401(k) rollovers should account for this embedded difference when modeling aggregate household risk.

Contribution rates remain an open frontier
Since the PPA didn’t materially change how much people save, encouraging higher contribution rates remains one of the most effective ways advisors can improve retirement readiness.

How to Explain This to Clients

“Most people didn’t consciously decide to take more or less risk in their retirement accounts—the default did it for them. After the Pension Protection Act, most plans automatically put new employees into target date funds, which invest more in stocks when you’re young and shift into bonds as you age. That means your portfolio’s risk is managed for you—but it also means you may need to check if the glidepath actually fits your goals.”

The Most Important Chart from the Paper

Figure 4: Target date fund share by birth cohort. This figure shows the share of portfolios invested in target date funds (TDFs) averaged by birth-year cohorts. Panel A shows the averages by year over our sample period. We include only those years during which each member of the cohort is 25 to 65 years old, unless otherwise indicated. Panel B shows the averages by age, where age is the median age of the cohort. TDFs are mutual funds that maintain a given portfolio share of assets invested in different asset classes, where the shares change with the number of years until the “target date,” the expected retirement date of the investor. A cohort is defined as having been born in the three-year period centered around the year indicated. The sample comprises our full set of retirement investors (RI).

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

Abstract

Using account-level data on millions of U.S. middle-class investors over 2006 to 2018, we characterize the share of investable wealth that they hold in the stock market over their working lives. Relative to the 1990s, this share has both risen by 10% and become age-dependent. The Pension Protection Act (PPA)—which allowed target date funds (TDFs) to be default options in retirement plans—played an important role: younger (older) workers starting at a firm after TDFs became the default option post-PPA invested more (less) in stocks, in line with the TDF glidepath. In contrast, contribution rates changed little following the PPA.