Target-Date Funds Dominate 401(k) Plans

In 2011, 18% of Vanguard participants held “extreme” or concentrated allocations — 10% with only equities and 8% with no equities. In contrast, when TDFs first became available in Vanguard plans in 2004, 35% of Vanguard participants held extreme allocations — 22% invested only in equities and 13% percent did not invest at all in equities. (Target-date investors cannot hold extreme positions because target-date options include both equity and fixed income asset classes.)

Among pure target-date investors, virtually all have equity allocations ranging from 51% to 90% of their portfolios. A large group of pure target-date investors has equity allocations in the 81% to 90% range. This phenomenon reflects two facts, Vanguard says: (1) automatic enrollment into target-date funds, which typically applies to newly eligible plan participants, who are disproportionately under age 40, and (2) in voluntary enrollment plans, a single target-date fund is a popular strategy among new hires.

Target-date funds continue to reshape investment patterns in DC plans in fundamental ways, Vanguard strategists and researchers believe, with three factors driving their growing use by plan sponsors and participants: their simplified approach to investment decision-making and portfolio construction, the growing use of automatic enrollment, and their designation as a qualified default under the Pension Protection Act of 2006.

The fund giant also says that target-date fund adoption by Vanguard-plan sponsors accelerated from 13% of plans in 2004 to 82% of plans in 2011. While introduced only within the last decade among Vanguard plans, target-date strategies accounted for 14% of total plan assets by 2011.