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Portfolio > Mutual Funds

Use of TDFs Surges in 401(k)s

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Target date funds have become much more common in 401(k) plans since 2006, according to a new study by BrightScope and the Investment Company Institute.

The study, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans,” analyzes plan-level data from 2006 through 2012 gathered from audited Form 5500 filings of private-sector defined contribution plans.

In 2006, TDFs were offered by less than a third (about 29%) of plans in the study and by 2012 the percentage of plans offering target date funds as an investment option had risen to nearly 70%. Similarly, the percentage of participants that were offered TDFs also increased – from 39.5% in 2006 to 69.8% in 2012.

As the study notes, “a target date fund typically rebalances its portfolio to become less focused on growth and more focused on income as it approaches and passes the target date of the fund, which is usually included in the fund’s name.”

From 2006 to 2012, the percentage of 401(k) plan assets invested in target date funds also saw a drastic increase. The percentage of plan assets in TDFs went from 3% in 2006 to more than 13% in 2012.

Cerulli Associates, according to new research released Tuesday, expects those target-date assets to capture almost 90% of 401(k) contributions by 2019.  

“The market for target-date funds is highly competitive given the industry’s expectations for future flows, and we anticipate that competition will intensify,” states Jessica Sclafani, senior analyst at Cerulli, in a statement. “Target-date funds captured nearly 40% of flows in 2013, and we expect this number to more than double before the end of the decade.”

According to the BrightScope/ICI report, there were about eight target date funds on average in 2012 in a suite of target date funds covering a range of anticipated retirement dates.

While the use of TDFs in 401(k)s may be on the rise, mutual funds proved to be the winner of “most common investment vehicle in 401(k) plans,” according to BrightScope and ICI’s research, and equity funds accounted for the “largest share of assets in 401(k) plans.”

Mutual funds held 46% of 401(k) plan assets in 2012. Where were the rest of the plan assets? Collective investment trusts held 21% of assets, guaranteed investment contracts held 12%, separate accounts held 3%, and the remaining 18% was invested in individual stocks (including company stock), bonds, brokerage, and other investments.

Mutual funds accounted for more than half of the assets in all but the largest plans, where collective investment trusts accounted for a somewhat larger share of assets than mutual funds.

“The flexible structure of 401(k) plans allows employers to shape their own plan designs to meet the needs of their workforce,” says ICI Chief Economist Brian Reid in a statement. “These data suggest that employers, working with employees and plan service providers, have adopted a variety of features that can encourage employee participation, provide a range of appropriate investment choices, and result generally in use of lower-cost mutual funds. This flexibility and innovation are keys to the success of the 401(k) and should be encouraged.”

Equity funds accounted for the largest share of assets in 401(k) plans, according to Brightscope/ICI.

In 2012, about 40% of assets were held in equity funds, more than 15% was held in balanced funds (with most of that being held in TDFs), and about 10% was held in bond funds. GICs and money funds accounted for 15% of assets.

The study, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans,” focuses on about 35,500 defined contribution plans, nearly all of which were 401(k) plans with 100 or more participants, drawn from the BrightScope Defined Contribution Plan Database. The database uses data from audited reports that the plans were required to file with the Department of Labor.

Because 401(k) plans with fewer than 100 participants are generally not required to file the audited reports required of larger plans, the database does not contain many small plans. While most 401(k) plans are small plans, most participants and assets are in larger plans.

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