Give us your poor(er), your young(er), your lower tenured – and you’re (more likely) find them in a target-date fund.
New research from Vanguard finds that target-date fund (TDF) investors are more likely to be younger, lower-wage, shorter-tenured participants. In contrast, managed account investors have balances that are much higher, reflecting longer tenure and longer plan participation, according to the report.
In 2016, 53% of Vanguard participants were fully invested in a “professionally managed allocation” – a single TDF, a single target-risk or traditional balanced fund, or a managed account advisory service. Forty-six percent of participants were invested in a single TDF in 2016 – a percentage that has nearly doubled over the past five years. Indeed, among new plan entrants (those entering the plan for the first time), 8 in 10 participants were invested in a single TDF.
Single-TDF investors appear to select, or are defaulted into, a TDF with an appropriate target date; half of participants ages 25 to 34 are invested in a 2050 TDF, with most of the other participants using either a 2045 or 2055 TDF. Similarly, about half of participants ages 55 to 64 are invested in a 2025 TDF, with most of the other participants using a 2020 TDF.
Average and median account balances for single target-date and balanced fund investors are approximately one-third of the assets accumulated by all participants
The report notes that TDF adoption by Vanguard plan sponsors has accelerated from 58% of plans in 2007 to 92% of plans in 2016, and now amount to 28% of total Vanguard DC plan assets and half of total DC plan contributions last year.
Auto Enroll Trends
Fueling the TDF trends were automatic enrollment plan designs. By year-end 2016, 45% of Vanguard plans had adopted automatic enrollment, with half automatically enrolling both existing nonparticipants and newly eligible participants. Adoption of automatic enrollment by Vanguard plan sponsors has tripled since 2007. In fact, among plans with more than 1,000 participants, two-thirds had adopted the feature by 2016. Six in 10 of all Vanguard participants were in plans with automatic enrollment.
Whether or not they used automatic enrollment, 89% of all Vanguard plans had selected a target-date or balanced fund as a default investment by year-end. Eight in 10 plans had specifically designated a qualified default investment alternative (QDIA). Among plans designating a QDIA, 96% of the QDIAs were target-date options and 4% were balanced funds. Fewer than 1% of plans had selected a managed account advisory service. Nearly all (97%) of plans with automatic enrollment are using TDFs as their default fund.