Who’s Mixed Up?
Half of “mixed” target-date investing stems from sponsor
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
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.
Overall, many participants are becoming more
diversified by holding a target-date fund, the analysis found. Since 2004, the
percentage of investors holding a single fund only in cash investments has
declined from 43% to 18%, while the percentage of investors holding only one
target-date or other type of balanced fund has grown to 69%. —PA