Employees who are automatically enrolled in target-date funds when they are signed up for a 401(k) plan are very likely to stick with the target date investment strategy for the long haul, according to a study conducted by the Employee Benefit Research Institute (EBRI).
Using it’s database of some 20 million participants in some 50,000 employer-offered 401(k) plans, EBRI found that among plan participants who were identified as auto-enrollees in 2007, 97.2% who had been placed into target date funds were still enrolled in target date funds a year later and the fall off by 2009 -- a period in which many investors were cashing out of stocks and bonds -- still only lowered the percentage staying in target date funds to 95.7%.
Also, even among those who were not auto-enrolled in their 401(k) plan and signed up voluntarily, the EBRI study found considerable persistence for target-date fund investments. Between 2007 and 2009, only just over 10% of those who had initially put their money into target date funds had shifted to other investment vehicles.
Target Date Funds, which automatically reset the investor’s asset mix according to a predetermined path over a certain time frame until an anticipated retirement date, have been very popular among retirement savers.
These plans are often the default investment strategy in company 401(k) programs where workers are auto-enrolled when they are hired. Looking at its universe of 50,000 401k) plans, EBRI reports that more than two-thirds, or 67.3%, offered target date funds as an option.
In 2007, 38.9% of the employees in EBRI’s database had at least some of their 401(k) assets allocated into target date funds. By 2008, that figure increased to 42.6%, rising to 43.2% in 2009. Roughly one-third of those 401(k) participants who had some money invested in target date funds had all their assets in them. Not surprisingly, among those who were 100% invested in target date funds in 2007, 83% were still 100% allocated to target date funds in 2009.
The average allocation within 401(k) target date funds in 2009 was 31.1% stocks, with the balance of assets in bonds, money funds, guaranteed investment contracts and stable value funds.
Those who shifted out of target date funds were found to generally be older workers or workers who had larger accounts.
Craig Copeland, author of the study, says the main conclusion -- one that financial advisors working with employers on setting up a retirement plan -- is that “Once TDFs are used, they are very likely to continue to be used for a number of years afterward, certainly in the short term.”
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