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TDF Adoption to Jump to 75% of 401(k) Holders: Vanguard

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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.

By year-end 2013, 34% of Vanguard plans — covering nearly 60% of all participants — had adopted automatic enrollment, typically for participants newly eligible to take advantage of their plan.

Regardless of whether they use automatic enrollment, 81% of all Vanguard plans used a target-date or balanced fund as a default investment by the end of 2013.

Advisor Alpha

Also on Monday, Vanguard said financial advisors can add up to about 3% in net returns for their clients using its wealth management program Advisor’s Alpha.

“We believe advisors have the opportunity to meaningfully improve investor outcomes, and we are pleased to be able to provide advisors a mechanism to demonstrate their value to clients in a quantifiable manner,” said Francis Kinniry Jr., one of the study’s authors and a principal in Vanguard’s Investment Strategy Group, in a statement. “As the industry continues to evolve from a commission-based to a fee-based model, advisors who successfully explain their value have more time to serve clients, leading to increased client satisfaction and retention.”

Calculating how much an advisor can add in net returns is based largely on their approach to five wealth management principles, the fund group says. Examples of how advisors add value include:

  • Being an effective behavioral coach. Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice (1.50%);
  • Applying an asset location strategy. The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year (0.75%.);
  • Employing cost-effective investments. This critical component of every advisor’s tool kit is based on simple math: Gross return less costs equals net return (0.45%.); 
  • Maintaining the proper allocation through rebalancing. Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences (0.35%);
  • Implementing a spending strategy. As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios (0.70%).


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