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

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.