With many investors embracing target-date mutual funds, Americans are now on the right track with retirement savings, according to a Vanguard study.

The study examined records for more than 3.2 million participants in the mutual fund giant's defined contribution plans to see how their portfolios performed last year. It found that 16% of savers were enrolled in a single target-date fund.

"One of the criticisms [of the industry] is whether we can teach all of the participants how to invest effectively," said Jean Young, a researcher and lead author of the report.

By giving investors their choice of 18 target-date funds, Young said, Vanguard has let investors make more educated decisions about their automatic investments.

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 approach their distribution phase. During 2008, a lot of target-date funds sustained heavy losses, which shocked many investors who expected their portfolios to become more conservative as they neared retirement.

Young said, however, that investors are having a more informed dialogue with their financial advisers about target-date funds. They have learned that most of the high-profile losses occurred in funds that took extremely hard hits. Also, these funds had a moderate number of investors.

The study also showed that one-quarter of all participants in defined contribution retirement savings plans last year chose to put all their money into a single automatic investment plan by yearend, up from 7% in 2005.

Investors were fond of other automatic investment vehicles, too. Six percent held a traditional balanced fund, and 3% used managed accounts.

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

Equity allocations varied dramatically, as nearly 30% of participants took extreme positions. About 14% of participants held only equities, and 15% held less than 20% in equities. Also, savers continued to reduce concentrations of stock holdings in the plan's sponsoring company.

Among plans that offered the company's equity, Vanguard said, the share of participants who held more than 20% of their savings in that stock fell to 30% in 2009, from 45% in 2005.

Last year, savers who participated in defined contribution plans saw their account balances rise by 23% from the 2008 level. By the end of 2009, about two-thirds of participants had account balances 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 10% for savers who had a balance in September 2007, as asset values grew and people put more money into their retirement plans.

And from September 2007 to December 2009, 6% of defined contribution plan participants had losses of more than 30%, according to Vanguard.

Yet investors could participate more 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, the researcher 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 may still be working but could have had to absorb a pay cut, loss of company matching contributions or the joblessness of a spouse.

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