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
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.
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