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Portfolio > Mutual Funds

Stunning Usage Jump in Target-Date Funds

By Savita Iyer-Ahrestani, Savita Iyer-Ahrestani

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The percentage of Vanguard defined contribution (DC) plans offering target-date funds increased from 13% of plans in 2004 to a noteworthy 75% in 2009, according to a recent study done by the company.

“Plan sponsors, in their capacity as fiduciaries, recognize the value of target-date funds in helping participants make wise portfolio construction decisions, which is one of the key factors that can lead to sufficient retirement savings,” Jean Young, a researcher at the Vanguard Center for Retirement Research and co-author of the report, said in a Vanguard statement. “This level of support indicates the funds’ importance to the future of retirement savings and runs counter to the views of some critics that they are not suitable investment options.”

Target-date funds suffered significant losses in the financial market downturn and have been criticized for being too inflexible, for taking on too much risk and, by some, for taking in excessive fees. However, target-date funds are also the centerpiece of many Americans’ retirement portfolios, and according to the Vanguard statement, they are the predominant choice for plans offering a qualified default investment alternative (QDIA).

“What’s often overlooked by commentators is that many participants are choosing target-funds because they want to, not because their employer is making the decision for them,” Young said.

Of all plans at Vanguard that have designated a QDIA, 80% chose target-date funds as the default, the company said, and 21% of Vanguard plans have adopted automatic enrollment. Adoption of automatic enrollment has quadrupled since the end of 2005, and nine in 10 plans with automatic enrollment are using target-date funds as their designated default fund, Vanguard said.

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