July 15, 2014
Target Date Funds Keep Growing
The number of employers offering target date funds as an option in their 401(k) plans, and the number of workers using these funds, continue to increase.
In 2013, 86 percent of all employer plans offered target date funds (TDFs) – double the share of plans offering them in 2006 – according to Vanguard’s annual report on defined-contribution plans, “How America Saves 2014,” released in June.
Vanguard data also support TDFs’ growing popularity among employees: more than half of plan participants now have some or all of their retirement accounts in TDFs, compared with just one in 10 in 2006.
TDFs eliminate the need for employees to wade in and make complex investment decisions about choosing and updating their asset allocations. A TDF initially invests largely in stocks, but the portfolio becomes more conservative and the allocation to stocks declines as the individual approaches the targeted retirement date he selected.
Brooks Herman, head of data and research for BrightScope, a firm that tracks retirement trends, said the total assets held in TDFs – $624 billion currently – increased in the wake of 2006 federal legislation that encouraged their use as the default option for 401(k)s and similar plans.
For example, the total assets in TDFs with targeted retirement dates in 2040, 2045, and 2050 rose last year by 34 percent, 37 percent, and 46 percent, respectively. BrightScope did not break down how much of this growth came from contributions, versus investment gains. But the Standard & Poor’s 500 stock index rose 26 percent in 2013, and bond returns were small or negative.
Brightscope’s Herman works in the investment business, but even his retirement savings is invested in TDFs.
His reason no doubt resonates with others who choose that option: “I have other things to worry about,” Herman said.