New 401(k) Participants Rely on Target-Date Funds

Popularity of index funds is also up

By Stephen Miller, CEBS December 30, 2014

The evolution of 401(k) plan designs has resulted in a significant increase in the use of balanced multi-asset-class funds—and, in particular, the growing use of target-date funds (TDFs)—by recently hired employees, a December 2014 research report shows.

The study of 401(k) plan asset allocation by the nonprofit Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), an industry group, found that nearly two-thirds of recently hired 401(k) plan participants were invested in balanced funds such as TDFs, compared with less than one-third of recently hired participants 15 years earlier.

“As a result of the growing use of automatic enrollment and qualified default investment alternatives (including TDFs), recently hired participants were more likely to hold TDFs than those with more years on the job,” noted Nevin Adams, chief of communications at the American Society of Pension Professionals and Actuaries, in an online post. He pointed to the study’s findings that:

  • 51 percent of plan participants with two or fewer years of tenure held TDFs in 401(k) accounts.
  • 41 percent of participants with more than five years of tenure held TDFs.
  • Just a quarter of participants with more than 30 years of tenure held TDFs.

One reason for lower TDF use among longer-tenured employees is that only about a third of plans that auto-enroll new employees (generally into TDFs, with an option to opt out) also annually auto-enroll current workers that don’t participate in the plan, Adams noted.

New 401(k) Plan Participants Have Increased Use of Balanced Funds over Time

Percentage of recently hired participants holding balanced funds, 1998–2013


Source: EBRI/ICI participant-directed retirement plan data collection project.

Broader Diversification

Age tends to correlate with job tenure, so it’s not surprising that the study also shows younger 401(k) plan participants were more likely to be invested in TDFs. Younger employees also had higher allocations to equities (stock holdings) in the 401(k) portfolios—accounting for more than three-quarters of 401(k) assets among participants in their 20s or 30s—compared with older participants. Participants in their 60s had a little more than half of their 401(k) assets invested in equities. TDFs contain both equities and fixed income (bond) holdings, increasing the fixed income portion of the fund as the target retirement year approaches.

“The growing use of [TDF] funds in recent years, especially among new 401(k) participants, has been accompanied by a marked decrease of young participants with zero equity exposure,” commented Jack VanDerhei, EBRI research director. “The increased use [of TDFs] has also been associated with a decrease in older participants with high concentrations in equities as well as a continued reduction in the allocation to company stock among 401(k) participants,” he said.

In another finding from the survey, the average account balance among 401(k) plan participants in their 60s (with more than 30 years of tenure) was nearly $250,000. The average 401(k) participant account balance among all participants was $72,383.

The study was based on the EBRI/ICI database of employer-sponsored 401(k) plans, which includes statistics on 72,676 plans that cover about half of the universe of 401(k) participants.

Index Fund Popularity Also Up

In a separate study report released in December 2014, ICI partnered with BrightScope, a 401(k) rating firm. The BrightScope/ICI Defined Contribution Plan Profileanalyzed plan-level data from 2006 through 2012 gathered from audited Form 5500 filings of private-sector defined contribution plans. Among the findings:

  • TDF availability and use. The percentage of participants offered TDFs rose from 39.5 percent of participants to 69.8 percent, and the percentage of assets invested in TDFs rose from 3 percent to 13.4 percent.
  • Index fund options. Index funds, which generally have lower expense ratios than actively managed funds, hold nearly a quarter of 401(k) plan assets. Nearly 85 percent of 401(k) plans have index funds in their investment lineups, offering 4.5 funds on average. That’s up from 77 percent that offered index fund options six years earlier.
  • Contribution rates. 59 percent of plans with auto-enrollment defaulted auto-enrolled participants to a contribution rate of 3 percent of salary, while 14 percent of plans had a default initial contribution rate of 2 percent, 11 percent had a default initial contribution rate of 4 percent, and 12 percent had a default initial contribution rate of 5 percent or more.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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