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Portfolio > Mutual Funds > Target Date Funds

Target date funds ever more common in DC plans

By Warren S. Hersch

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Target-date funds are increasingly the norm in employer-sponsored defined contribution plans. The latest evidence of this comes from Fidelity Investments, which concludes in a new report that eight in 10 not-for-profit health care plans now have a target-date fund as the default investment. 

The survey, “Defining Excellence: Plan Design and Retirement Readiness in the Not-for-Profit Healthcare Industry,” is the second in a series of reports from Fidelity that examines trends in retirement plan design, administration and best practices in the not-for-profit healthcare sector.

The percentage of health care plans with a target date fund as the default investment option has been steadily rising. The 80 percent penetration rate recorded in the fourth quarter of 2012 compares with 76 percent, 74 percent and 72 percent, respectively, in the fourth quarters of 2011, 2010 and 2009.

The survey also observes that the percentage of participants with age-based asset allocation drops markedly as age increases. In contrast, the percentage of participants with more aggressive and more conservative equity allocation increases.

Between ages 60 and 64, for example, age-based asset allocation is just 48 percent, well below the higher levels recorded at ages 50-59 (53 percent), 40-49 (60 percent), 30-39 (73 percent) and 20-29 (84 percent). The report attributes the strong age-based asset allocation exhibited by younger participants to the “the effect of target date funds being introduced over the last decade” as a qualified default investment alternative.

“Target-date funds are a significant factor in increasing age-based asset allocation,” the report states. “The percentage of employees exhibiting age-based asset allocation for not-for-profit health care is 62 percent.”

The average retirement plan participation rate is 66 percent across the non-for-profit healthcare industry, up four percent since 2010, the report adds. Contributing to the increasing is employer matching of employee contributions. On average, the report finds, participation rates are more than 20 percentage points higher in plans offering matching employer contributions (66 percent versus 43 percent).

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