When it comes new 401(k) plan participants, the prevalence of automatic enrollment features and qualified default investment alternatives in employer defined contribution plans have led to an exorbitant increase in the use of target-date funds.
Over the past 15 years, its definitely the recent hires who are most likely to use TDFs, explains Jack VanDerhei, research director at the Employee Benefit Research Institute. Automatic retirement features and target-date funds serving as the sole QDIA option for many may also have had an impact on TDF growth, VanDerhei says.
For 401(k) plan participants, at least those who are considered new entrants into these retirement plans, VanDerhei says there does not seem to be any great degree of option out of the default investment into something else over the first couple of years.
New research from EBRI and the Investment Company Institute, a national association of U.S. investment companies, highlights that there has been a significant bump in target-date fund use in 2013 among plan participants as compared to the same recent hire pool in 1998. Approximately two-thirds of recent hires invested in target-date funds and roughly three-quarters allocated more than 90% of their 401(k) plan assets in these investment strategies.
Fifteen years earlier, only one-third of new hires opted to invest in target-date funds, the EBRI/ICIs annual 401(k) Plan Asset Allocation, Account Balances and Loan Activity study indicates. The change over time can be credited to the overwhelming evolution in plan design, says EBN blogger Robert C. Lawton, president of Lawton Retirement Plan Consultants, LLC.
Most large plan sponsors have implemented auto-enrollment for new hires, which defaults contributions into the target-date funds and most new hires are not changing their investment elections from the target-date fund default, says Lawton, while adding that more plans sponsors are also re-enrolling all participants into their target-date funds each year and participants are not transferring out of the target-date funds.
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Last year, 71% of 401(k) plans included TDFs in their investment fund line-ups. Barring any changes back to the investment landscape prior to the Pension Protection Act of 2006, VanDerhei suspects that target-date funds will continue to manage a large helping of retirement assets for the long haul.
As long as QDIAs stay in their current form and automatic enrollment continues to be in favor with the employers that currently have it, I would be hard pressed to imagine a situation to which we go back to the type of situation we had prior to 2008, when regulations for the PPA took effect.
Moreover, Lawton, a Milwaukee, Wisc.-based consultant who helps employers manage their retirement plan responsibilities, says an increased focus on retirement education for plan participants may also be adding to this escalation.
The employee education plan participants are receiving is reinforcing their use of target-date funds, Lawton says. The end result is that participants receive confirmation that investing in target-date funds is an appropriate investment strategy.
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