Participants Stick with Target-Date Funds
The use of target-date funds is more likely among participants who are younger, have lower account balances, and have shorter tenure at their current job, according to a study released by the nonpartisan Employee Benefit Research Institute (EBRI).
However, the study in the July 2010 EBRI Notes, available at www.ebri.org, also found target-date users are likely to stick with their fund over time, making the design of TDFs (especially the investment allocation glide path) more critical, according to a news release. The share of all 401(k) plan participants using TDFs increased from 25% in 2007 to 31% in 2008.
Of those participants having an allocation to TDFs in 2007, 93.9% still had some of their account balance allocated to TDFs in 2008. Nearly 10% of participants who were in a plan in 2007 that offered TDFs but did not use them in 2007 were using them in 2008.
Of those participants who were in a plan that offered a TDF in 2007 and were still in the EBRI/Investment Company Institute database in 2008, 36% had at least some of their account balance in TDFs. By 2008, of this same group of participants, 39.8% had at least some of their account balance in TDFs.
The news release said participants with the lowest salaries were more likely to stay in TDFs and begin using them in 2008. However, as salaries increased, there was no significant difference in new TDF use.
As a participant’s plan size increased, the likelihood of new TDF use in 2008 increased, but the probability of continuing use showed very little change across plan sizes. In plans with 1−10 participants, 94.8% of those using TDFs in 2007 still had dollars allocated to them in 2008, compared with 93% of those in plans with more than 10,000 participants.
The study found the participants most likely to stop using TDFs and least likely to start using them if they have not already done so are those with the highest levels of tenure and the highest account balances. Of those participants in 2007 with 30 or more years of tenure and having some of their account balance allocated to TDFs, 85.8% continued to have some assets in TDFs in 2008. For comparison, of participants in 2007 with two to five years of tenure, 95.5% remained allocated to TDFs in 2008 after having done so in 2007.
The average age of participants using TDFs in 2007 was 43.1 and in 2008 it was 42.4, compared with 45.6 and 46.2, respectively, for those participants not using TDFs.