New data indicates that target-date funds are used by roughly 55% of the participants in 401(k) plans at Vanguard, referencing a growing attraction to balanced investment options that automatically cuts down risk with age.
With more than 4,000 defined contribution plans and over 3.5 million participants under the Vanguard umbrella, new information notes that target-date fund attraction among half of the 401(k) participants is likely due to large take-up among retirement plan sponsors. Approximately 86% of the 401(k) and DC plans at the Valley Forge, Pa.-based investment management company currently offer these vehicles.
Additional statistics find that one-third of plan contributions are derived from these fund options. In 2013, approximately 31% of all Vanguard participants held a single target-date fund.
These funds provide appropriate levels of risk as a participant ages and a remedy to the problem of extreme asset allocations, says Jean Young, author of the new research report and a senior analyst in Vanguards Center for Retirement Research. For these reasons, we expect the adoption of TDFs to continue in the coming years.
Some specific retirement plan features that may have helped with the target-date adoption is automatic enrollment and analysis of other diversified fund options that fall under the qualified default investment alternatives label.
At the end of last year, approximately 34% of Vanguard plans implemented automatic enrollment and default investment options. As a result, approximately 81% of all Vanguard plans used target-date or balanced funds as their default option.
According to Vanguards researcher, there is a logical explanation to why target-date fund use is thriving among DC plans.
Three factors are driving their growing use by plan sponsors and participants: their simplified approach to investment decision-making and portfolio construction, the growing use of automatic enrollment, and their designation as a QDIA under the [Pension Protection Act], Young lists in the research.
Overall, target-date funds have seen an uptick among 401(k) plan participants, according to information released in December 2013 from the Investment Company Institute and the Employee Benefit Research Institute. At year-end 2012, 41% of 401(k) participants held target date funds, which was a three percentage point increase.
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