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More Than Defaults Funding TDFs

Last year, four-in-ten contribution dollars were directed to target-date funds, according to a new report.

Eighty-eight percent of plan sponsors recordkept by Vanguard offered target-date funds at year-end 2014, and nearly two-thirds (64%) of all participants use them. In fact, 60% even use them the way they are designed to be used, with 100% of their account invested in a single target-date fund.

Target date fund investors are more likely to be younger, lower wage, shorter-tenured, and (probably as a result), have smaller balances. But as for the notion that they are all being defaulted there, the report notes that among the group that is using target-date funds “properly,” half were in plans where those participants had chosen that option (rather than being defaulted into it).

Vanguard also notes that, since 2005, the fraction of plans offering target-risk funds as an investment option as fallen by more than half, from 45% of plans to 21% of plans, though 15% of plans maintain both target-risk and target-date options (in 2005, just 6% offered both, but the percentage has held steady in the 15%-16% range since 2009).

According to “How America Saves 2015,” among Vanguard recordkeeping clients, the adoption of automatic enrollment has grown by 50% since the end of 2009; 36% of those plans offered AE at the end of 2014, up two percentage points from a year earlier. Vanguard notes that 60% of new plan entrants in 2014 were automatically enrolled, and that at year-end 2014, more than half of all contributing participants were in plans with automatic enrollment. Vanguard notes that plans with AE enjoy an overall participation rate of 89%, compared with 61% among plans with voluntary enrollment.

Significantly, Vanguard notes that AE, which had been largely applied only to new hires, has now been applied to eligible nonparticipants in half of the plans with the AE feature. Additionally, seven in ten AE plans have now adopted contribution acceleration increases.

At year-end 2014, Roth 401(k) was in place at more than half (56%) of Vanguard plans, and 14% of participants with this option had chosen it. Those who embraced the option tended to be younger and shorter-tenured participants.

Only 10% of DC participants made transfers in their accounts during 2014. Only 2% of participants holding a single target date fund traded during the year.

More than half (58%) of employers allowed workers to make elective contributions immediate upon hire. However, 15% required eligible workers to wait a year – with smaller programs more likely to impose the waiting period.


New participant loans were down 4%, and 17% had a loan outstanding, flat with 2013 level. More than half (54%) of plans that offered loans limited it to a single loan. Loan use was found to be highest among participants who earn less than $30,000 – almost one in four of those participants had a loan outstanding. That group also had the lowest participation level (46%).

The rate of new non-hardship withdrawals more than doubled from 2005 to 2014, though Vanguard noted that these have spikes in activity, which were attributed to the withdrawal of employer profit-sharing contributions.

About four-in-ten participants who took a withdrawal in 2014 had also taken a withdrawal in 2013 – and one-in-ten had taken a withdrawal in each of the preceding five years.

Rollover Ranges

Six-in-ten plans allow participants to set up installment payments, and not quite one-in-five offer some kind of annuity option. More than 90% of the assets available for distribution were preserved for retirement, either because they were retained in the current plan, or rolled over (to an IRA or other qualified plan). Among participants with termination dates in 2014, half (49%) left their balances, in the plan, 22% did a rollover, and 28% took a cash lump sum (1% took a combination of lump sum and rollover).