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Who’s Mixed Up? 

Half of “mixed” target-date investing stems from sponsor actions

An analysis from Vanguard finds that about half of mixed target-date investing—holding a target-date fund in combination with other investments—stems from sponsor actions.

Those actions may include employer contributions in company stock; non-elective contributions to the plan’s default fund; recordkeeping corrections applied to the plan’s default fund; or mapping of assets from an existing investment option to a target-date default because of a plan menu change.

The other half of mixed investors intentionally construct a portfolio of both target-date and non-target-date strategies. Many are pursuing what appear to be diversification strategies, although they do not fit within the “all-in-one” portfolio approach of the target-date concept.

The latest analysis indicates that “pure” investors are more likely to be younger, lower-wage, shorter-tenured participants with lower 401(k) account balances than other investors. Meanwhile, “mixed” investors appear very much like non-target-date investors in terms of their demographic and portfolio characteristics.

TDFs Growing in Popularity

Target-date fund adoption by Vanguard plan sponsors has accelerated from 13% of plans in 2004 to 79% of plans in 2010. Target-date funds are rapidly replacing risk-based lifestyle funds in plan investment menus, Vanguard said in its analysis.

While relatively new among Vanguard plans, target-date strategies­ in 2010 accounted for one of every seven dollars of plan assets among those plans offering the strategy. Almost half of participants who were offered target-date funds had an investment in them.

Participants enrolling in defined contribution (DC) plans in 2010 allocated a total of 54% of 2010 contributions to target-date funds—they are the first group of participants to allocate more than half of plan contributions to target-date funds, Vanguard noted.

Nine in 10 plans with automatic enrollment are using target-date funds as their default fund. Whether or not they use automatic enrollment, 75% of all Vanguard plans had selected a target-date or balanced fund as a default investment in 2010. Among the six in 10 plans designating a qualified default investment alternative (QDIA), 89% of the QDIAs were target-date options, and 11% were balanced funds.