Vanguard said Monday that 64% of new 401(k) plan participants now hold their balances in TDFs. But Vanguard estimates this figure will jump to 75% in 2018.
“Target-date funds continue to reshape investment patterns in DC plans in fundamental ways. These funds provide appropriate levels of risk as a participant ages and a remedy to the problem of extreme asset allocations,” explained Vanguard senior research analyst Jean Young in a statement. “For these reasons, we expect the adoption of TDFs to continue in the coming years.”
Thirty-one percent of all Vanguard participants held a single TDF in 2013, more than double the figure from five years earlier, Vanguard said in its latest TDF report; this figure should jump to 48% by 2018. Among participants entering the plan for the first time, two-thirds were invested in a single TDF.
About half of TDF investors at Vanguard are considered “mixed investors,” meaning they hold a TDF in combination with other investments. In 2013, 46% of all TDF investors fell in this category. Of those, about half became mixed investors as a result of plan-sponsor decisions, including employer contributions in company stock or other actions.
The other half of mixed investors say they intentionally constructed a portfolio of both target-date and non-target-date strategies. Many participants pursue what seem to be “reasonable diversification strategies,” though they do not fit within the “all-in-one” portfolio approach of target-date funds, according to Vanguard.
Although many participants choose to invest in TDFs on their own, a major factor influencing the rise of these funds is their use as a default investment for companies that auto-enroll their employees.