By Cyril Tuohy
Target date funds, mutual funds that are automatically rebalanced to coincide with the approximate date an employee retires from the workforce, were held by 41 percent of 401(k) participants, a 2 percentage point increase from 2011, the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI) report.
In addition, 15 percent of the assets in the EBRI/ICI 401(k) database were invested in target date funds at the end of 2012, a 2 percentage point increase from 2011, the “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012” report also found.
In the past six years, more employers have been offering target date funds as an option for workers who prefer to leave the portfolio investment mix to professional advisors and computer models rather than to tinker with different funds in search of the optimum investment allocation.
The younger the investor, the more the target date fund is weighted toward stocks which have higher returns than bonds or cash over the long term.
“Fears that retirement savers would abandon equities in the wake of the financial crisis have not been borne out by the data,” Sarah Holden, ICI senior director of retirement and investor research, said in a news release. “And, target date funds are playing an important role for 401(k) investors, particularly younger participants, by maintaining age-appropriate concentrations in equities.”
The idea behind a target date fund – in effect a fund of funds – is that it is the only fund an employee really needs. The automatic rebalancing features, which change concentration exposures away from stocks and toward bonds as the plan participant ages and approaches retirement, are designed to keep employees sleeping well at night.
In practice, however, employees tend to invest only part of their 401(k) in target date funds, with rest going to other funds offered by their employers. At the end of 2012, for instance, only 43 percent of the account balances of recently hired participants in their 20s were invested in target date funds, up from 40 percent in 2011, the report said.
An employee joining the workforce in 2014 and retiring in 2050, has 36 years before leaving the workforce and the “Target Retirement 2050” fund would be heavily exposed to stocks. An employee with a “Target Retirement 2020” portfolio would have a higher concentration in bonds and cash.
With the percentage of 401(k) participants holding target date funds doubling since 2006, and the percentage of 401(k) assets invested in target date funds tripling since 2006 thanks to market returns, target date funds appear to be popular with plan participants.
“More new or recent hires invested their 401(k) assets in balanced funds, including target date funds,” said EBRI Research Director Jack VanDerhei.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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