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Single Target-Date Fund Investment by 401(k) Participants Surges: Vanguard

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Vanguard’s annual defined contribution benchmarking report, released Wednesday, shows that 51% of its 401(k) participants are currently invested in a single target-date fund, up from just 13% a decade ago. Among those who entered the plan in 2017, 84% are invested in a single TDF.

Because of growing use of the target-date option, Vanguard researchers estimate that three-quarters of its participants will be solely invested in a single TDF by 2022.

Vanguard noted that about a tenth of participants tend to hold extreme allocations when they construct their own retirement portfolios — 0% or 100% equities.

The advent of TDFs has resulted in broadly diversified portfolios for three-quarters of all participants, up from half 10 years ago. During the same period, the rate of participants holding concentrated stock positions fell by half.

Not only that, TDFs help investors stick to their investment plans. In 2017, only 2% of TDF investors executed a trade.

“Target date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers,” Martha King, managing director and head of the Vanguard Institutional Investor Group.

“Many participants lack the time, willingness and expertise to build and manage their retirement portfolios, and TDFs offer a professionally managed investment option at a very low cost.”

In its statement, Vanguard said it leads the industry in TDF assets and cash flow, with some $650 billion in TDF assets under management.

Citing a Morningstar report, it said 54% of all industry TDF cash flow went to Vanguard Target Retirement Funds in 2017. With an average asset-weighted cost of 0.13%, Vanguard TRFs cost one-quarter of the industry average, it noted.

Benefits of Automatic Enrollment

Vanguard said the dramatic rise of TDFs over the past 10 years, and the attendant portfolio construction benefit, has been driven by the adoption of automatic enrollment, which has tripled in the last decade to nearly half of plans.

A recent report put the rate at which employers automatically enroll new participants at 73%.

According to Vanguard, plans with automatic enrollment have a 92% participation rate, compared with a participation rate of just 57% for plans with voluntary enrollment.

It said that when automatic features were introduced 10 years ago, only a quarter of plan sponsors defaulted participants into plans at low rates in an attempt to prevent opt-outs. Now, half of plans default participants in at a savings rate of 4% or higher.

Not only are sponsors using higher default rates, it said, but of plans with automatic enrollment, two-thirds have also implemented automatic annual deferral rate increases, which have helped to narrow the spread between deferral rates for participants in voluntary plans vs. automatic enrollment plans to just 0.3 basis points.

“More people are participating in their employer-sponsored 401(k) plan than ever before, and saving at a healthy rate of about 10%,” Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of the report, said in the statement.

When both employee and employer contributions are taken into account, the average savings rate of 10.5% has held steady for 15 years, according to the research.

— Check out Best 401(k) Plans Ranked by Investors: J.D. Power — 2018 on ThinkAdvisor.


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