Thanks to the fact that many are embracing target-date funds, Americans are on the right track with their retirement savings, according to a study by Vanguard.

According to the study, 16% of savers are enrolled in a single target-date fund. In the last 20 months, the target-date fund business has come under heavy fire for having too much exposure to riskier assets as the funds approached the distribution phase. During 2008, a lot of target-date funds sustained heavy losses, which shocked many investors who expected to have a more conservative portfolio during retirement.

The study examined records for more than 3.2 million participants in its defined contribution plans to see how the portfolios performed last year.

Jean Young, a researcher and lead author of the report, said investors are having more informed dialogue with their financial advisors about target-date funds. They’ve learned that most of the high-profile losses stemmed from funds that took extremely hard hits. Also, those funds had a moderate number of investors. 

“One of the criticisms is whether we can teach all of the participants how to invest effectively,” Young said. By giving investors their choice of 18 target-date funds, Young said Vanguard has helped enable investors to make more educated decisions about their automatic investments.

A quarter of all participants in defined contribution retirement savings plans chose to put all of their money into a single automatic investment plan by the end of last year, up from 7% five years earlier. Investors are fond of other automatic investment vehicles, too. Six percent held a traditional balanced fund, and 3% used managed accounts.

Using automatic vehicles is just one way investors made strides last year, according to the study. Overall, investors were smarter about diversification.

Equity allocations varied dramatically, as one in three participants took extreme positions. Just 14% of participants held all equities, while 15% held less than 20% in equities. Also, savers continued to reduce concentrations of stock from the sponsor company in their portfolios.

Among plans that offered the company’s equity, Vanguard found, the number of participants who held more than 20% of their savings in that stock had dropped to 30% in 2009, from 45% in 2005.

Last year, savers who participated in defined contribution plans saw their account balances rise by 23% over 2008. By the end of 2009, about two-thirds of participants had account balances that were higher than they were in September 2007, just before the stock market hit its recent peak in October 2007.

Also, the median account balance rose by 10% for savers who had a balance in September 2007, as asset values went up and people put more money into their retirement plans. Also, from September 2007 to December 2009, only 6% of defined contribution participants had declines of more than 30%, according to Vanguard.

Yet investors could participate and save more in their defined contribution accounts, Young said. The participation rate was 75% in 2009, down from 77% in 2008. Once employer contributions were factored in, the savings rate was 9.4%. Still, Young said, investors should aim for a total savings rate of 12% to 15%. 

General economic conditions could be suppressing savings rates, Young said. A plan participant might still be working, but they might have absorbed a pay cut, loss of company matching or their spouse might have lost a job.