In 2011, 18% of Vanguard retirement plan participants held
extreme asset allocations—10% held only equities and 8% held no equities.
In contrast, when target-date funds (TDFs) first became
available in Vanguard plans in 2004, 35% of Vanguard participants held extreme
allocations—22% invested in equities only and 13% percent did not invest in
equities at all, according to a Vanguard study.
The study “Target-Date Fund Adoption in 2011” suggests the
rapid growth of target-date fund adoption has also led to the increasing use,
overall, of professionally managed account options, in which a fund manager or
third-party adviser makes portfolio-allocation and rebalancing decisions on
behalf of participants. The complete account balances of one-third of all
Vanguard participants were invested last year in a professionally managed
option—either a single target-date fund, a single traditional balanced fund or
a managed account advisory service.
Vanguard expects continued growth in professionally managed
options. “In five years, Vanguard estimates that 55% of all participants and
80% of new participants will be invested in a professionally managed option,”
says Jean Young, the study’s author and an analyst in Vanguard’s Center for
TDF Use Continues to Grow
Nearly one in four 401(k) participants invests solely in
TDFs—a six-fold increase over the past five years, according to the Vanguard
research. Adoption among new participants is considerably higher, with 64% of
employees who are entering a plan for the first time investing in a single
“Target-Date Fund Adoption in 2011” shows 82% of defined
contribution (DC) plans at Vanguard offered a target-date fund last year.
Moreover, among all defined contribution plans at Vanguard, 47% of participants
had a position in target-date funds, with 24% of all participants invested in
just one of these funds. The funds accounted for 27% of total plan
A major factor influencing the rise of target-date funds is
the automatic enrollment of participants into their plan and the plan sponsors’
decision to choose this type of fund as the default investment option, although
about half of participants investing in them make that decision voluntarily.
“We view this trend as extremely positive, because TDFs are
providing an increasing number of participants who are neither engaged nor
sophisticated investors with balanced, well-diversified portfolios, as well as
reducing the risks associated with extreme equity allocations,” says Young.