3 June 2020

Single Target Date Fund Popularity Growing

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Target-date funds have grown in popularity over the past decade, with Vanguard finding that more than half of 401(k) investors are invested in a single target-date fund. According to the "How America Saves 2018" annual defined contribution benchmarking report from one of the world's largest fund managers, the current level represents significant growth, as only 13% of 401(k) participants were invested in a single target-date fund 10 years ago.

"Target-date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers," said Martha King, managing director and head of the Vanguard Institutional Investor Group, in a press release last week highlighting the results of the research. "Many participants lack the time, willingness, and expertise to build and manage their retirement portfolios, and TDFs offer a professionally-managed investment option at a very low cost." By 2022, Vanguard predicts that 77% of 401(k) investors will be invested in a single target-date fund.

Target-date funds, which tend to become more conservative the closer the investor gets to retirement, have changed the investment patterns of those saving for retirement, with the investment product increasing diversification and deterring trading, Vanguard said. Vanguard has long subscribed to a buy-and-hold philosophy, and target-date funds dovetail with that view. The fund company noted that, when constructing retirement portfolios on their own, around 10% of retirement savers tend to have "extreme" allocations, but with the advent of target date funds, three-quarters of 401(k) participants now have diversified portfolios. That's up from half of participants a decade ago. What's more, Vanguard said that target-date funds help investors "stay the course," with only 2% of target-date fund investors executing a trade during all of last year.

Driving the growth of target-date funds over the past decade has been the advent of automatic enrollment, which Vanguard found tripled in the past 10 years to close to half of all plans. Plans with automatic enrollment have a 92% participation rate compared with a 57% participation rate for those plans that a retirement saver has to opt in to. "More people are participating in their employer-sponsored 401(k) plan than ever before, and saving at a healthy rate of about 10%," said Jean Young, senior research analyst at the Vanguard Center for Investor Research and lead author of "How America Saves," in the same press release. "After over a decade of leading this research, it's gratifying to see meaningful advances in plan design have such a tangible, positive impact on retirement savings for participants."

Click here for the original article from Investopedia.

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