Nearly a quarter of 401(k) participants invest solely in target-date funds—a six-fold increase over the past five years, according to new Vanguard research. Adoption among new participants is considerably higher, with 64 percent of employees entering their plan for the first time investing in a single target-date fund.
According to Target-Date Fund Adoption in 2011, 82 percent of defined contribution plans at Vanguard offered a TDF last year. And among all DC plans at Vanguard, 47 percent of participants had a position in TDFs, with 24 percent of all participants invested in a single target-date fund. The funds accounted for 27 percent of total plan contributions. A major factor influencing the rise of TDFs is the automatic enrollment of participants into their plan and the plan sponsors' decision to choose target-date funds as the default investment option, although about half of participants investing in them make that decision voluntarily.
"We view this trend as extremely positive because TDFs are providing an increasing number of participants who are neither engaged nor sophisticated investors with balanced, well-diversified portfolios, as well as reducing the risks associated with extreme equity allocations," said Jean Young, the study's author and an analyst in Vanguard's Center for Retirement Research.
In 2011, 18 percent of Vanguard participants held extreme allocations—10 percent with only equities and 8 percent with no equities. In contrast, when TDFs first became available in Vanguard plans in 2004, 35 percent of Vanguard participants held extreme allocations—22 percent invested only in equities and 13 percent did not invest at all in equities. Target-date investors cannot hold extreme positions because target-date options include both equity and fixed income asset classes.
