TDF Adoption Driven By Auto Enrollment

A new report by Vanguard offers insight into TDF trends and participant demographics.

The target-date fund (TDF) continues to be a dominating force in the defined contribution (DC) space. Adoption is being fueled in large part by automatic enrollment and its role as a default investment, according to a new report by Vanguard.

The firm finds that participation in the TDFs it manages has nearly doubled in the last five years with 46% of participants investing in a single TDF. Vanguard projects that by 2021, 75% of participants will be invested in a professionally managed account. The TDF is now a common fund in DC plans with 92% of plans offering it in 2016, compared with just 58% of plans in 2007.

Adoption of automatic enrollment by Vanguard plan sponsors has more than tripled since 2007. By year-end 2016, 45% of Vanguard plans had adopted automatic enrollment, and six in 10 of all Vanguard participants were in plans with automatic enrollment. Among plans with more than 1,000 participants, two-thirds had adopted automatic enrollment by 2016.

The TDF’s role as a qualified default investment alternative (QDIA) has also driven adoption, and Vanguard notes it offers “additional fiduciary protection.” According to the paper, 81% of new entrants invested in TDFs in 2016, as opposed to 30% in 2017.

Vanguard says, “Together, these two trends are a positive shift for plan participants, many of whom lack the time, willingness and investment expertise to build and manage their own retirement portfolio. By design, TDFs provide participants with sophisticated, built-in advice and a disciplined approach to risk-taking, helping to remedy the problem of extreme allocations and asset erosion over time.”

The Vanguard study also offers some insight into TDF investor behavior and participant demographics. Sixty-five percent of these participants are “pure investors,” meaning they invest in a single TDF. The firm found these people to be “more likely to be younger, lower-wage, shorter tenured participants with lower 401(k) account balances than other investors. Sixty-three percent of single-TDF investors were younger than 45.”  

The rest of participants are “mixed investors” who contribute to a TDF and other investments, or rarely a mix of different TDFs—suggesting participants may be steering away from TDF misuse.  Vanguard also found that the mixed investors are “very much like non-target-date investors in terms of their demographic and portfolio characteristics.”

The firm points out several TDF benefits for participants including TDF glide paths, which tend to decrease risk as a participant ages, and steer away from extreme equity exposure – something Vanguard says is common among do-it-yourself investors. Among pure target-date investors, the vast majority have equity allocations ranging from 51% to 90% of their portfolios.

The full paper can be found at