Target-Date Funds Gain Popularity in 403(b) Plans

A new survey found that more than half (51.2%) of 403(b) sponsors provide target-date funds in their plans.

However, almost one-fourth (24.2%) are unsure what target-date funds are, according to a news release about the Profit Sharing/401k Council of America (PSCA) study, sponsored by the Principal Financial Group. Another 21.8% of responding sponsors reported they do not currently offer the funds, but are considering it, and 21.2% said the funds are either unavailable from their provider or not recommended by the provider.

The poll also found that 36.8% have a target-date fund as their plan’s default investment option—more than double the number of plans that indicated they used a target-date fund as the default in a 2008 PSCA survey. Use of automatic enrollment in respondents’ 403(b) plans increased to 27.3% from 16.5% in the 2008 poll.

“Thousands of not-for-profit organizations in the U.S. rely on employee benefits such as 403(b) plans to compete for the best employees,” said David Wray, president of PSCA, in the news release. “This survey shows that 403(b) plans are evolving to more closely resemble 401(k) plans.”

According to the survey, more than 58% of respondents reported being either satisfied or very satisfied with their target-date funds.

Items deemed most important by respondents in developing a successful target-date fund offering include:

  • diverse asset allocation
  • quality of underlying investment managers,
  • liability risk minimization
  • cost control.

The survey was conducted in May and included 144 403(b) plans. The report is available here.