Freedom From Choice

You may remember little else about the 1989 film “Field of Dreams,” but odds are you’ve invoked a version of what is probably its most famous line: “If you build it, he will come.”

Unfortunately, for most retirement plan participants, building retirement savings is more complicated than constructing a baseball diamond in the middle of an Iowa cornfield. Most retirement plan advisors will admit that the most important decision in retirement saving is deciding how much to save, not how those savings will be invested — and yet, for years much of the education and discussion about retirement saving has been focused on investing.

Enter the target-date fund, a type of investment fund apportioned according to what investment professionals deem to be an appropriate blend of stocks, bonds and other asset classes for an individual within a particular target date of retirement. Perhaps more importantly, that apportioning is rebalanced over time as the target date approaches, becoming less focused on growth and more focused on income over time. It’s an approach to which individuals and plan sponsors alike have come to embrace with little of the reluctance that often accompanies new retirement plan designs — one that runs counter to decades of expanding retirement plan menus and education designed to help participants make better use of those choices.

Consider that 72% of the more than 64,000 401(k) plans in the EBRI/401(k) database, included target-date funds in their investment lineup at year-end 2011, 1 and that nearly 40% of the nearly 24 million participants in that database held target-date funds. 2 That’s sharply higher than 2006, the year in which the Pension Protection Act of 2006 included target-date funds in its definition of qualified default investment alternatives (QDIAs), when about 57% of plans included those offerings on their menus, and fewer than one in five participants held them in their accounts. Perhaps more significantly, at year-end 2011, 51% of participants in their 20s held target-date funds, compared with 32% of participants in their 60s.

Recently hired plan participants — those more likely to be automatically enrolled in their employment-based 401(k) and to have their savings automatically invested in a QDIA (frequently a target-date fund), were, not surprisingly, more likely to hold target-date funds than those with more years on the job: At year-end 2011, 51% of participants with two or fewer years of tenure held target-date funds, compared with 37% of participants with more than five to 10 years. In fact, an August 2011 EBRI Issue Brief noted that, among consistent participants in the EBRI/ICI database who were identified as auto-enrollees in 2007, 97.2% were still using TDFs in 2008, and 95.7% used them in 2008 and 2009. Even among those not identified as auto-enrollees, just over 90% continued to use them from 2007-2009 (see “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007-2009,” here).

Not that there aren’t points of disagreement on target-date design; there are different views on what is an “appropriate” asset allocation at a particular point in time, discrete perspectives as to what asset classes belong in the mix, notions that individuals aren’t well-served by a mix that disregards individual risk tolerances, and even disagreement as to whether the fund’s target-date is an end point or simply a milepost along the investment cycle.

That said, and as the EBRI/ICI data show, target-date funds, as well as their older counterparts, lifecycle (risk-based) and balanced funds, have become fixtures on the DC investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and the advisors that guide them, are likely to be an important aspect of building their retirement future.

Of course, the future they’ll build will likely be better if those investments are properly used, carefully monitored, better understood – and funded by the appropriate amount of savings.

  1. See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” here.
  2. In addition, 20% of the participants in the EBRI/ICI 401(k) database held non–target-date balanced funds, and 3% held both target-date and non-target-date balanced funds at year-end 2011.

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