August 30, 2011

401(k) Investors Who Choose TDFs Stay With Them

Auto-enrollment leads to higher utilization, especially among young investors

Retirement plan participants who invest in target-date funds tend to stay with them, the Employee Benefit Research Institute announced Tuesday. More than 90% of 401(k) participants who invested in TDFs in 2007 continued investing in them through 2009, the survey found. Those who used automatic enrollment were even more likely to remain in target-date funds.

TDF Use 2007-2009The organization used data from the EBRI/ICI 401(k) database for the study. It found that one-quarter of 401(k) participants used target-date funds in 2007, increasing to 31% in 2008 and to 33% in 2009. TDFs are frequently the default investment choice for plans with automatic enrollment, one reason for the increase in TDF use. Consequently, the investors most likely to stick with target-date funds are young and have low account balances. While their older, wealthier counterparts were more likely to stop investing in TDFs, overall, they still maintained a high utilization rate.

“Target-date funds are still very new in 401(k) plans, but these results suggest that once they are used, TDFs are very likely to continue to be used for a number of years afterward, certainly in the short term,” Craig Copeland, senior research director at EBRI and author of the report, said in a statement. He added that the popularity of auto-enrollment features means that the asset allocation within TDFs will likely be the same asset allocation TDF investors hold as long as they remain in their 401(k).

EBRI notes that there has been limited research on how participants use target-date funds over time, especially among those who were auto-enrolled. Among participants in the database who were auto-enrollees in their plan in 2007, over 97% were still using TDFs in 2008; 95% used them in 2008 and 2009.

Of participants who were using TDFs in 2007, almost 37% had all of their account allocated to target-date funds. By 2009, fewer participants were keeping all of their assets in TDFs; over 67% had less than 100% of their account allocated to the funds. However, of those in 2007 who did have 100% of their account allocated to target-date funds, 83% maintained a 100% allocation in 2009. Only 4% of participants with a 100% allocation in 2007 stopped using TDFs altogether by 2009.

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