Nearly one out of four pension plan participants invest solely in target-date funds, according to new research released from The Vanguard Group—a six-fold increase over the past five years. Further, adoption of these funds among new plan participants is even higher, with 64% of employees entering plan for the first time with a single target-date fund.
According to the firm's research, 82% of defined contribution plans at Vanguard offered a TDF last year. Moreover, among all DC plans at Vanguard, 47% of participants had a position in TDFs, with 24% of all participants invested in a single target-date fund. The funds accounted for 27% of total plan contributions.
“We view this trend as extremely positive because TDFs are providing an increasing number of participants who are neither engaged nor sophisticated investors with balanced, well-diversified portfolios, as well as reducing the risks associated with extreme equity allocations,” stated Jean Young, the study’s author and an analyst in Vanguard’s Center for Retirement Research.
The trend of adopting automatic enrollment—along with the choice of target date funds as a default investment—is a major factor driving the increase in target-fund adoption, the research reveals. By year-end 2011, 29% of Vanguard plans had adopted enrollment, with the feature typically applying to newly eligible participants.
Meanwhile, adoption of automatic enrollment by Vanguard plan sponsors has grown six-fold since 2005. Among plans with more than 1,000 participants, half had adopted the feature by 2011. Whether or not they use automatic enrollment, 77% of all Vanguard plans had selected a target-date or balanced fund as a default investment in 2011.