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Participants Who Use Target-Date Funds Stick with Them

By SHRM Online staff  9/1/2011
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401(k) participants who invest in target-date funds (TDFs) overwhelmingly tend to stick with these investments over time, according to research by the not-for-profit Employee Benefit Research Institute (EBRI).

Just over 90 percent of 401(k) participants investing in TDFs in 2007 stuck with them through 2009, EBRI found. Those identified as auto enrollees were even more likely to have stayed with TDFs, at a rate over 95 percent. In addition, 401(k) participants who were younger and had lower account balances were more likely to use TDFs and to continue to use them. Those more likely to stop investing in TDFs were older, had longer tenure or had higher account balances.

"These results suggest that once they are used, target-date funds are very likely to continue to be used for a number of years afterward," said Craig Copeland, senior research director at EBRI and author of the report, Target-Date Fund Use in 401(k) Plans and the Persistence of their Use, published in the August 2011 EBRI Issue Brief. "Consequently, the auto enrollment of participants into TDFs appears likely to stick, which means that the asset allocation within the TDFs is likely to be the asset allocation many of these participants will have while they remain in their 401(k) plan," Copeland remarked.

The EBRI report examined the use of TDFs by a consistent group of 401(k) participants from 2007 through 2009, using data from the EBRI/Investment Companies Institute 401(k) database.

A target-date fund is an investment that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a predetermined "glide path" over a selected time frame, typically until the participant expects to retire. The indicated year is usually reflected in the investment's name. A TDF for an older worker about to retire (such as a "2015 Fund") would have a lower percentage of stocks in its asset mix and more bonds and cash equivalents, while a TDF for a younger worker (such as a "2060 Fund") would have a higher percentage of stocks and few bonds or cash equivalents. Stocks are far more volatile than bonds and can be subject to steep short-term sell offs that can last several years, but provide long-term opportunities for substantial capital growth.

The use of TDFs in 401(k) plans has increased rapidly in recent years. The portion of 401(k) plan participants using TDFs rose from 25 percent in 2007 to 31 percent in 2008 and to 33 percent in 2009. One of the reasons for this growth is that TDFs have been a popular choice for the default fund when 401(k) plans have an auto enrollment feature. Consequently, younger participants, participants with lower account balances and participants with shorter tenure at their current job are more likely to use them, according to the EBRI report.

Related Articles:

Plan Sponsors Pick and Choose Funds in Target-Date Series, SHRM Online Benefits Discipline, August 2011

Balance Urged on Proposed Target-Date Fund Disclosures, SHRM Online Benefits Discipline, January 2011

Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009

Target-Date Funds: Four Key Considerations for Plan Sponsors, SHRM Online Benefits Discipline, April 2008

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