Most New DC Participants Use TDF or Balanced Fund

A new study from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute finds 401(k) plan design changes have led to substantial popularity for balanced funds, especially target-date funds (TDFs).

The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013,” finds that nearly two-thirds of recently hired 401(k) participants were invested in balanced funds at year-end 2013, compared with less than one-third of recently hired participants at year-end 1998. In addition, among recent hires investing in balanced funds, EBRI and ICI say more than three-quarters had invested more than 90% of their 401(k) account in such funds at year-end 2013.

Sarah Holden, ICI senior director of retirement and investor research, says the popularity of TDFs and balanced funds more generally has its roots in regulatory changes—namely passage of the Pension Protection Act (PPA) of 2006. With the PPA, sponsors gained the ability to designate qualified default investment alternatives (QDIAs) for those novice investors who decline to make an investment decision when entering a 401(k) plan or related defined contribution (DC) arrangement, which provide more fiduciary protection than default fund options previously had.

“These data suggest that regulatory changes have helped make it easier for employers to design their plans to cater to the wide array of 401(k) plan investors, ranging from folks who want to do it themselves—constructing a portfolio from the investments offered—to those who are invested in target-date funds for professional asset allocation, diversification, and rebalancing over time,” Holden explains. “This evolution in plan design has resulted in increased diversification across asset categories, on average, for 401(k) plan participants.”

The analysis notes that balanced funds can include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product holding an automatic mix of equities and fixed-income securities.

Target-date funds have played an especially large part in the increased role of balanced funds, the analysis finds. At year-end 2013, recently hired 401(k) plan participants had 41% of their 401(k) plan assets invested in balanced funds, with 32% invested in TDFs. The research finds that overall, across the entire 26.4 million 401(k) plan participants in the EBRI/ICI 401(k) database, target-date funds represent 15% of plan assets, and 41% of 401(k) plan participants overall hold shares in TDFs.

As noted by Jack VanDerhei, EBRI research director, “Target-date funds provide a convenient investment choice for 401(k) participants to automatically diversify at least a portion of their retirement portfolios and maintain age-appropriate asset allocations even during volatile financial markets.”

“The growing use of these funds in recent years, especially among new 401(k) participants, has been accompanied by a marked decrease of young participants with zero equity exposure,” VanDerhei continues. “The increased use of target-date funds has also been associated with a decrease in older participants with high concentrations in equities as well as a continued reduction in the allocation to company stock among 401(k) participants.”

The research also finds 401(k) investors are favoring investments in equities heading into 2015, a year anticipated by many to be somewhat volatile but positive overall for stocks.

The EBRI/ICI analysis shows that at year-end 2013, 66% of 401(k) plan participants’ accounts were invested in equities—through equity funds, the equity portion of target-date funds, the equity portion of non-target-date balanced funds, and company stock. Further, 90% of 401(k) plan participants held at least some equities in their retirement accounts.

Although equity funds represented the largest share of 401(k) plan assets, target-date funds, which often are invested to a significant degree in equities, also are playing an important role. The report shows younger 401(k) plan participants had higher allocations to equities—accounting for more than three-quarters of 401(k) assets among participants in their 20s or 30s. For reference, participants in their 60s had a little more than half of their 401(k) assets invested in equities.

Other key findings from the study show 401(k) loan activity held steady in 2013. The study notes that at year-end 2013, 21% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from the prior four years, although still slightly elevated compared with the levels seen prior to the financial crisis.

As expected, the average 401(k) account balance tends to increase with participant age and tenure. Age, tenure, salary, contribution behavior, rollovers from other plans, asset allocation, withdrawals, loan activity, and employer contribution rates all affect an individual’s account balance at any point in time, EBRI and ICI note. For example, at year-end 2013, the average account balance among 401(k) plan participants in their 60s with more than 30 years of tenure was nearly $250,000. The average 401(k) participant account balance for the entire sample was $72,383.

The study is based on the EBRI/ICI database of employer-sponsored 401(k) plans, a collaborative research project undertaken by the two organizations since 1996. The 2013 EBRI/ICI database includes statistical information on 26.4 million 401(k) plan participants in 72,676 plans, which hold $1.912 trillion in assets and cover about half of the universe of 401(k) participants.

A full copy of the EBRI/ICI report is available here.