Target-date or life-cycle funds, which automatically rebalance over time, are being used by more than one-third of investors, according to the Employee Benefit Research Institute, which has a database with close to 22 million participants that it mines on a regular basis in cooperation with the Investment Company Institute, the fund industry’s professional association. In addition, target-date investors seem to concentrate their target-date investments in certain fund families.
Of the 401(k) plan participants in the EBRI/ICI 401(k) database and in plans offering target-date funds, 37 percent had at least some fraction of their account in target-date funds in 2007. Target-date funds held about 7 percent of total assets in 401(k) plans and the use of these funds is expected to increase in the future. (The Pension Protection Act of 2006 made it easier for plan sponsors to automatically enroll new workers in a 401(k) plan, and target-date funds were one of the types of approved funds specified for a “default” investment if the participant does not elect a choice.)
Younger workers are significantly more likely to invest in target-date funds than are older workers, according to EPBR. Nearly 44 percent of participants under 30 had assets in a target-date fund, compared with 27 percent of those 60 and up. Target-date funds appear to appeal to those with lower incomes, little time on the job and with few assets. On average, target-date fund investors are about 2.5 years younger than those who do not invest in target-date funds, have about 3.5 years less tenure, make about $11,000 less in salary, have $25,000 less in their account and are in smaller plans.
The data show that workers considered to be automatically enrolled in a 401(k) plan are significantly more likely to invest all their assets in a target-date fund than those who voluntarily join. They were also less likely to have extreme all-or-nothing asset allocations to equities.
This analysis also finds that the relative rank of the equity allocation within a target-date fund does not appear to affect the percentage of participants investing all their account into that fund. Nevertheless, investors in specific fund families are more likely to invest all their assets in a single target-date fund from that family.
The impact of the 2008 market declines on individual 401(k) participants is mainly determined by their account balance, age and job tenure, EBRI finds, in a separate study.
Investors with low account balances relative to contributions experienced minimal investment losses that were typically more than made up by contributions: Those with less than $10,000 in account balances had an average growth of 40 percent during 2008, since contributions had a bigger impact than investment losses. However, those with more than $200,000 in account balances had an average loss of more than 25 percent.
Those on the verge of retirement (ages 56-65) had average changes of between a positive 1 percent for short-tenure individuals (one to four years with the current employer) to more than a 25 percent loss for those with long tenure (with more than 20 years).
When a consistent sample of 2.2 million participants who had been with the same 401(k) plan sponsor for the seven years from 1999-2006 was analyzed, the average estimated growth rates for the period from Jan. 1, 2000 through Jan. 20, 2009, ranged from +29 percent for long-tenure older participants to more than +500 percent for short-tenure younger participants.
This analysis also calculates how long it might take for end-of-year 2008 401(k) balances to recover to their beginning-of-year 2008 levels, before the sharp stock market declines. At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but roughly five years at the 90th percentile. If the equity rate of return is assumed to drop to zero for the next few years, this recovery time increases to approximately 2.5 years at the median and nine to 10 years at the 90th percentile.
Estimates from the EBRI/ICI 401(k) database indicate that many participants near retirement had exceptionally high exposure to equities: Nearly 1 in 4 between ages 56-65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 percent.