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Although there are many participants enrolled in defined contribution plans today that combine target-date funds with other plan investments, it’s best to be cautious when mixing target-date funds with the rest of a portfolio, according to a new Morningstar study.

“An investor who would like a more aggressive allocation would generally be better off moving along the target-date fund glide path by selecting a vintage (or target-date year) with a higher risk level than mixing the target-date fund with equity (or bond) funds from the core menu,” David Blanchett, head of retirement research at the firm, said in a new report, “Mixed Target-Date Fund Investors: Is There a Method to the Madness?”

Why do so many DC plan participants mix target-date funds? “There are likely myriad reasons,” he said, adding: “One key reason is likely because target-date funds typically appear as a single investment option (that is, a ‘black box’) on a plan website or participant statement, similar to other equity or bonds funds, and investors aren’t aware that target-date funds are actually diversified options designed to be held by themselves.”

In fact, combining the target-date fund with other funds to create a more diversified portfolio “will likely have the opposite effect, reducing the portfolio’s efficiency,” he warned.

Other findings from the report include:

  • There are potentially more than 10 million participants in defined contribution plans today combining target-date funds with other plan investments.
  • Target-date funds are “best used” as part of an “all or none” investment option because “mixing target-date funds with other plan investments significantly diminishes, and potentially eliminates, their value.”
  • Mixed target-date fund investors have attributes suggesting they’re “more sophisticated than investors who use the default investment (for example, they have higher salaries and higher balances), but less sophisticated than participants self-directing their accounts and not using target-date funds.”
  • Overall, mixed target-date fund investors seem to have relatively diversified portfolios, but tend to be “more aggressive than the average target-date fund would be for a given age, especially at older ages.”
  • The average allocation of mixed target-date fund investors is 37% target-date funds, 49% equity funds and 13% bond funds. The “non-target-date fund weights are relatively constant across different levels of target-date fund holdings.”
  • Plan sponsors should encourage participants not interested in using a target-date fund in its entirety to use a type of in-plan advice solution, such as advice or managed accounts.

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