Benefits and Compensation

Most 401(k) Plan Participants Will Invest in TDFs by 2017, Vanguard Says

Target-date funds’ popularity over the last 10 years has soared, among both plan sponsors and participants, so odds are your plan offers these as an investment option. Their wide acceptance after being designated an eligible qualified default investment alternative for automatically enrolled new participants seems likely to guarantee their ultimate presence in most plans.

A study by money manager Vanguard predicts, based on its own participation figures, that 55 percent of all participants and 80 percent of new entrants will be invested in such a professionally managed option by 2017.

TDFs usually are named for the year a participant plans to retire and leave the workforce. The funds gradually shift emphasis from more aggressive investments, primarily equities, to more conservative ones, based on this target date.

If you’re thinking about adding a TDF option for the first time, or if you’re seeking justification to propose to your plan committee adding even more of these menu choices, Vanguard’s recently released data on which 2012 participants used TDFs and why may be useful.

“Target-Date Fund Adoption in 2012” makes tangible TDFs’ rapid growth and ubiquity, using statistics from 3.2 million unique participants with 3.4 million accounts at 2,000 DC plans Vanguard administers. Among its findings, the February 2013 report showed:

  • 84 percent of plans administered by Vanguard (which tend to be larger-asset plans) offered a TDF, jumping from 13 percent in 2004;
  • 27 percent of Vanguard participants were completely invested in a single TDF, a percentage that’s up threefold over the last five years;
  • half of all participants in the study had a position in TDFs; and
  • funds in Vanguard TDFs accounted for 31 percent of total plan contributions.

Who’s in, and How They Got There

The Vanguard report on 2012 said that on average, 46 percent of account balances were invested in TDFs, indicating that not all participants are placing their assets in these funds alone. But at the same time, 72 percent of their 2012 total contributions were directed to Vanguard’s TDFs. The report identifies two types of TDF participants: “pure investors” who hold all their assets in a single TDF (these accounted for 54 percent of TDF investors) and “mixed investors,” the remainder who hold a TDF along with other investments or, rarely, multiple TDFs.

One important effect of increased TDF adoption is how it’s reshaping participant portfolios, according to Vanguard. “One of the benefits of TDFs is that they eliminate extreme equity allocations,” the report said. So high-risk portfolios containing only equities (14 percent of non-TDF investors in this study) or lower-growth models with no equities (11 percent) become the exception to the rule.

“By design, the funds lead to a disciplined approach to portfolio risk-taking, with risk levels falling as a participant ages,” the Vanguard report concluded. “For these reasons, their adoption is likely to continue to rise in the coming years.”

Finding out More

To read the complete story on Thompson’s HR Compliance Expert, click here.

For further information on using TDFs as an automatic enrollment QDIA, see ¶111 in The 401(k) Handbook.