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.    

In January, Vanguard reported another survey found a variety of reasons that mixed investors diversified among target-date and non-target-date funds (see “Survey Finds Understanding of Target-Date Funds”). 

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 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 6 in 10 plans designating a QDIA, 89% of the QDIAs were target-date options and 11% were balanced funds. Less than 1% of plans had selected a managed account advisory service. 

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%. 

The report, “Target-date fund adoption in 2010,” can be downloaded from here