Which Participants Are More Likely to Hold TDFs?

With more than 70% of 401(k) plans including target-date funds in their investment lineup, and a growing number of plans adopting auto enrollment and using TDFs as their default fund, you’d expect significant growth in TDF assets.

And you’d be right. At year-end 2014, nearly one-in-five (18%) of the assets in the EBRI/ICI 401(k) database were invested in TDFs and nearly half (48%) of the 24.9 million participants in the database held them.

Not surprisingly, the report by the nonpartisan Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found a majority of new or recent hires invested their 401(k) assets in balanced funds, including TDFs. For example, at year-end 2014, two-thirds of recently hired participants held balanced funds in their 401(k) plan accounts, and balanced funds comprised 42% of the account balances of recently hired 401(k) plan participants (a significant subset of that balanced fund category is invested in TDFs). Among participants who were offered TDFs, 65% held them at year-end 2014. In fact, at year-end 2014, 35% of the account balances of recently hired participants were invested in TDFs.

Target-date fund use varies with participant age and tenure. According to the report, younger participants were more likely to hold TDFs than older participants. At year-end 2014, 60% of participants in their 20s held TDFs, compared with 41% of participants in their 60s.

Indeed, it may not be so much about age as hire date – or, more specifically, recent hires that are defaulted into those balanced/TDF choices. Consider that recently hired participants were more likely to hold target-date funds than those with more years on the job: at year-end 2014, 59% of participants with two or fewer years of tenure held TDFs, compared with about half of participants with more than five to 10 years of tenure, and fewer than 30% of participants with more than 30 years of tenure.

The report also notes that recently hired participants in 2014 tended to be more likely to hold balanced funds compared with recent hires in the past. About two-thirds of recently hired 401(k) plan participants from 2011 through 2014 held balanced funds, compared with less than half in 2006, and one-third in 2002. At year-end 2014, 59% of recently hired 401(k) participants held TDFs, while 12% held non-target-date balanced funds, and 4% held both target-date and non-target-date balanced funds.

Among those who held balanced funds, recently hired participants in 2014 were more likely to hold a high concentration of their accounts in balanced funds compared with past years: At year-end 2014, 79% of recently hired participants holding balanced funds had more than 90% of their account balance invested in balanced funds, compared with 77% in 2013, 43% in 2006, and just 7% in 1998.

The report further notes that concentration is highest among recently hired participants with target-date funds; at year-end 2014, 78% of recently hired participants holding TDFs held more than 90% of their account balance in them. Forty-one percent of recently hired participants holding non-target-date balanced funds had more than 90% of their account balance invested in those funds at year-end 2014.

The report notes that comparing recently hired participants in 2014 with similar age groups in 1998 also illustrates that asset allocation to balanced funds tended to be higher in 2014 than in 1998, rising from 9% of the account balances of recently hired participants in 1998 to 42% in 2014. The share of account balances invested in equity funds decreased over the same period, from 65% for recently hired participants in 1998 to 37% for recently hired participants in 2014.

In addition to devoting a greater share of their assets to balanced funds, recently hired participants also have become more likely to hold these diversified investment options. At year-end 2014, 67% of recently hired 401(k) participants held balanced funds, compared with 29% at year-end 1998.

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