Target date funds, which have become default investments for defined contribution retirement plans, accounting for one-quarter of their total assets and 40% of new contributions, may not deserve their growing popularity.
A new report from Alight Solutions, a recordkeeper for 401(k) plans, found that plan participants investing in TDFs exclusively or partially save less than participants who don’t invest in TDFs because they contribute less.
On average, participants who invest exclusively in TDFs contribute 2.2 percentage points less than other investors: 6.2% versus 8.4%, according to the Alight Solutions report, which is based on the behavior of approximately 2.5 million TDF investors as of Jan. 1, 2019. Total assets of TDFs were $1.10 trillion at year-end 2018 with DC funds accounting for two-thirds of those assets, according to ICI and Morningstar.
“Target date funds are better than money market and stable value as default investments [which had prevailed previously] but they may not be the perfect investment,” says Rob Austin, Vice president and head of research at Alight, which was spun off from Aon Hewitt in 2017 sale to the Blackstone Group.
The study isolated the two variables that were thought to be the reasons behind the lower contributions by TDF investors — more younger investors who tend to save less than older investors and more auto-enrolled investors who tend to remain at the usually low preset contribution rate. “But even when those variables were taken out of the equation people were still saving less,” says Austin.