While many continue to debate the pros and cons of target
date funds, one thing appears certain: the prevalence of TDFs in 401(k) plans
has grown substantially since enactment of the Pension Protection Act of 2006.
A new report from EBRI and ICI details how both the
percentage of 401(k) plans offering TDFs and the percentage of participants
investing in them have soared. As of 2018, the percentage of 401(k) plans
offering TDFs was nearly 80%, while the percentage of participants investing in
TDFs reached 56%. This is up from 57% of plans that offered TDFs in 2006 and
only 19% of participants who held TDFs at that time. What’s more, TDF assets
were more than a quarter (27%) of 401(k) plan assets in the EBRI/ICI database,
compared to only 5% as of 2006.
The report, Target Date Funds: Evidence Points to Growing
Popularity and Appropriate Use by 401(k) Plan Participants, analyzes 401(k)
plan participants use of TDFs using year-end 2018 data from the EBRI/ICI 401(k)
database, which includes statistical information on 14.6 million 401(k) plan
participants in 90,987 plans, which hold $1.1 trillion in assets and covers 25%
of the universe of active 401(k) participants, 15% of plans, and 21% of 401(k)
plan assets.
Age Appropriateness
Among the report’s other key findings are that the vast
majority (88%) of 401(k) participants investing in TDFs hold a single,
age-appropriate TDF. EBRI found that 94% of 401(k) participants owning TDFs
held one at year-end 2018, with little variation by participant age. For
example, nearly all (97%) of 401(k) plan participants in their 20s holding TDFs
held one, compared with 93% of 401(k) plan TDF investors in their 50s and 60s.
The analysis also found that TDFs held in 401(k) plans tend
to be held by appropriately aged 401(k) plan participants. For example, 83% of
401(k) plan participants holding 2040 TDFs had ages in line with reaching age
65 around 2040, while 96% of 401(k) plan TDF investors in the 2035 funds were
appropriately aged.
For purposes of the analysis, EBRI notes that 401(k) plan
participants invested in the TDF with the target date closest to the year that
they turn 65 are considered in their age-appropriate TDF. Of course, individual
investors may have a different target retirement age in mind or may be seeking
more focus on growth (choosing a later target date than their age suggests) or
more focus on income (choosing an earlier target date than their age suggests),
the report observes.
Among 401(k) plan participants holding one TDF, 91% of those
in their 20s held a TDF appropriate to their age, similar to those in their
50s. Only 9% of those in their 20s held a fund with an earlier target
date—making them young for the fund—compared with 5% of those in their 50s. The
remaining 2% of those in their 50s held a fund with a later target date, making
them old for the fund.
Asset Allocation
Younger 401(k) participants are more likely to hold TDFs
than older participants and hold a higher concentration of assets in those
funds. As such, younger 401(k) savers are more likely to have been offered TDFs
when they enrolled or may have been automatically enrolled into these funds as
a default investment, compared with older participants, the report observes.
At year-end 2018, 62% of 401(k) plan participants in their
20s held TDFs, compared with 50% of those in their 60s. Similarly, 51% of
401(k) plan assets of participants in their 20s were invested in TDFs, compared
with 23% among those in their 60s.
Overall, 401(k) plan TDF investors had slightly higher allocations
to equities than 401(k) savers not using TDFs, although the difference was more
pronounced among younger investors, the report notes.
At year-end 2018, 401(k) plan TDF investors had 66% of their
401(k) plan assets invested in equities, compared with 60% for plan
participants not holding TDFs. The youngest 401(k) plan TDF investors had the
highest allocation to equities compared with their counterparts not holding
TDFs. Older 401(k) plan participants had similar allocations to equities
whether they were TDF investors or not.
Younger 401(k) plan TDF investors were also found to hold a
higher concentration of their accounts in TDFs than older 401(k) plan TDF
investors. In this instance, 88% of 401(k) plan participants in their 20s
holding TDFs held more than 90% of their accounts in TDFs at year-end 2018. In
contrast, about two-thirds of TDF investors in their 50s and 60s had such a
high concentration.
“The increased availability of TDFs in 401(k) plans,
combined with the trend to use them as default investments when savers are
auto-enrolled in a plan, has driven much of the growth in their use over time,”
notes Jack VanDerhei, EBRI’s research director. “A recently hired 401(k) plan
participant today will typically have a broad array of TDFs to select from,
allowing them to choose an appropriate TDF to meet their goals for an earlier
or later retirement date or to suit their risk tolerance.”
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