Sponsors of 401(k) plans worry that investors will either invest too heavily in risky equities, or too conservatively in money market funds, but in 2007, at least, target-date funds allocated investors money wisely across the board, Vanguard found.
After analyzing 1,300 defined contribution plans representing 1.24 million participants, in a report called Target-Date Funds: Plan and Participant Adoption in 2007, Vanguard found that 357,000, or roughly 28%, were actively contributing to target-date funds.
Thirty percent were invested 100% in risky equities, and 16% held portfolios primarily invested in highly conservative portfolios. By contrast, those holding target-date funds had equity exposure ranging from 40% to 90% of their holdings, depending on their age.
Target-date funds help participants adhere to the principles of prudent investing, said Stephen P. Utkus, head of the Center for Retirement Research at Vanguard. On the one hand, these funds maintain a positive equity exposure in pursuit of higher long-term returns. On the other hand, they are broadly diversified and reduce equity exposure over time in order to mitigate the risks associated with equity markets.