Target Date Funds Keep Growing

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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.

4 comments
Ken Pidcock

Yeah, OK. But realize that these things are funds of funds that exist to provide every fund in a family access to clients. Which is reflected in expenses. The “complex investment decisions” from which TDFs promise to spare us aren’t really all that complex at all, but there’s serious money to be made in convincing us that they are. Caveat emptor.

Rick Patsy

Ken,

Your point is well taken but let’s not throw the baby out with the bathwater. Plan participants utilizing TDF’s will be getting at least some semblance of an appropriate investment solution as opposed to a 25 year old who is invested 100% in a money market fund. Or a participant in 2009 who moves 100% of their equity holdings into a money market or bond fund. While TDF’s a not a panacea, most participants who utilize one will end up in a far better place then if they tried to make their own asset allocation decisions.

Warren Flick

Another potential cost of target-date funds is that they continue to decrease stock allocations well into retirement, yet many retirees, especially those who maintain modest spending levels, can bear much more risk as retirement progresses. They can bear more risk because their portfolio is likely to grow through retirement while their spending needs stabilize (at least until health care expenses kick in). I’ve recently written about this on my blog, Later Living, and there is a great article in a recent issue of AAII Journal (American Association of Individual Investors).

Chris

The vast majority of investor need to be in one kind of a target date fund or another, especially for qualified retirement plans. Most employees don’t get the time to be educated, and most plans don’t provide adequate education. The alternative is target date funds. The additional cost is a pretty cheap substitute for an advisory fee.

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