Target-Date Investors: Younger, with Lower Salaries

Those in target-date funds are younger, make less money, and have smaller account balances than those not choosing the options.

An Employee Benefit Research Institute (EBRI) news release about its analysis of 2007 data from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project said almost 44% of participants under age 30 had assets in a target-date fund, compared to 27% of those 60 or older.

On average, target-date investors are about 2.5 years younger than those not in the funds; have about 3.5 years less tenure; make about $11,000 less in salary; have $25,000 less in their account; and are in smaller plans, according to EBRI.

As the participant’s tenure increases, it is less likely that he or she is invested entirely in target-date funds. For non-auto-enrollees, EBRI found, the percentage not completely invested in target-date funds increases from 48.4% for those with less than two years of tenure to 76% for those with 20 or more years of tenure. The portion of those with all their assets in a target-date fund, using only one fund, stays relatively constant across tenure levels at about 92% to 96%.

EBRI said that when examining participants by age and year of target-date fund, approximately three-fourths of target-date investors use a fund that has a target date near an expected retirement year for their age cohort. For example, 76.8% of participants investing in target-date funds who were younger than 30 use a target fund dated from 2040 to 2050, while 83.6% of the participants 60 years old or older use a target-date fund of 2015 or earlier.

Effects of Auto Enrollment

EBRI said the data show that auto-enrolled participants are significantly more likely to have all of their assets in the funds rather than those who voluntarily opted for them, and were less likely to have extreme asset allocations in equities. However, participants in target-date funds generally were less likely to have all-or-nothing equity allocations compared to those not in the funds.

The EBRI analysis reflected the increasing popularity of target-date funds. About 37% of participants offered target-date funds put at least some of their assets in the funds in 2007. Target-date funds held about 7% of total assets in 401(k) plans.

While EBRI said its data could help paint a significant portrait of a target-date investor, the picture was still not completely clear.

“One major issue this Issue Brief is not able to address is what individuals who invest in target-date funds will do over their employment life cycle, particularly among those defaulted into a 401(k) plan under an automatic enrollment arrangement,” wrote author Craig Copeland. “Further research will examine if participants continue to maintain their holdings within the target-date funds and what they do outside of them, as they become more familiar with these options.”

The EBRI study is available here.