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.”