Target Date Funds Growing in Popularity

Target date funds are growing in popularity among defined-contribution participants, according to Vanguard. In its latest “How America Saves” report, the company says that 47% of defined-contribution participants invested in a target date fund, up from 18% in 2007.

The investment firm thinks the use of target date funds as an automatic or default investment strategy is an important factor influencing the finding. As of year-end 2011, two-thirds of Vanguard defined-contribution plans had a designated qualified default investment alternative QDIA. This is a preselected investment option used if an employee does not specify which funds he wants his savings to be invested in. (Based on the trends it is seeing, Vanguard projects that by 2016, 55% of all participants and 80% of new plan entrants will be entirely invested in a target date fund or another type of professionally managed allocation strategy.)

The shift to QDIA and automatic enrollment plans is intended to encourage more workers to save for retirement. The downside of automatic enrollment plans may be a lower savings rate. The survey calculated an average savings rate of 7.1% last year, down from the 7.3% peak realized in 2007.

The average account balance was $78,276 last year, and the median balance was $25,500. Participants allocated 65% of their portfolios to equities, down from 68% in 2010. (Equity allocations were 73% in 2007.) Just 11% of participants traded (meaning shifted money from fund to another), down from 16% in 2008. On a net basis, 2.5% of assets were shifted to fixed-income funds.

Target date funds may also play a role in the small number of participants adopting an all-or-nothing approach to stocks. Just 1% of participants abandoned equities last year, while 8% had no allocation to equities and 10% were fully invested in equities. The percentage of plan participants with “extreme” allocations is the lowest since at least 2002.

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