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Dispatches

Target-Date Funds Popular in Younger Demographics

Many investors are including more target-date funds in their investment strategies, a trend particularly exhibited by younger investors.

by Jack Gilleland | October 2021

Many investors are including more target-date funds in their investment strategies, a trend particularly exhibited by younger investors.

Target-date funds provide a diversification opportunity that allows individuals to transition from growth strategies to income strategies as the funds approach their target date (investor retirement date). This strategy is most popular among investors between 20 and 30 years old.

As of year-end 2018, 62% of 401(k) plan participants in their 20s held target-date funds versus 50% of those in their 60s.

Younger investors also tend to hold a higher percentage of their account in target-date funds, with 88% of 401(k) plan participants in their 20s allocating most of their retirement account (more than 90%) to such funds. In comparison, investors who are in their 50s and 60s allocate only about 67% of their accounts to target-date funds.

Investors in target-date funds tend to hold funds appropriate for their age groups. Among 401(k) plan participants holding 2040 target-date funds, 83% will turn 65 around 2040. Similarly, 96% of the 2035 target-date funds were held by individuals who would reach age 65 in 2035.

Most investors with a target-date fund in a 401(k) plan hold just one fund. This makes sense, as target-date funds are designed to provide an age-appropriate allocation.

Overall, usage of target-date funds has grown since their creation in 1994. These funds were offered by nearly eight out of 10 401(k) plans as of the end of 2018. Approximately 56% of all 401(k) participants own target-date funds. Additionally, target-date fund assets account for 27% of total plan assets.

These statistics come from a study conducted by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI). Data was provided by both EBRI and ICI members for the period of 1996 through 2018. The two organizations collected and analyzed annual data on millions of 401(k) plan participants’ accounts.

Target-Date Fund Use Is Higher Among Younger 401(k) Plan Participants

Source: “Target Date Funds: Evidence Points to Growing Popularity and Appropriate Use by 401(k) Plan Participants,” by Sarah Holden, Jack VanDerhei and Steven Bass; EBRI Issue Brief, September 9, 2021.

Discussion

ROBERT A from NC posted over 4 years ago:

How about some data on the relative performance of these target date funds? The returns I've seen are abysmal in relation to low-expense-ratio broad-index equity funds.


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