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Target-Date Fund Domination Expected to Endure

Target Date Funds

Target-date funds continue to reshape investment patterns in DC plans in fundamental ways – and their expanding usage is expected to continue for the foreseeable future, according to a new report. 

In 2018, nearly 60% of Vanguard participants in DC plans were invested in a professionally managed account option, including 52% who were invested in a single TDF. This level of participants investing in a single TDF has more than tripled over the past 10 years, from 16% in 2009, according to the firm’s analysis of TDF adoption

Among new plan entrants, an overwhelming 84% of participants were invested in a single TDF. And because of the growing use of TD options, Vanguard anticipates that 8 in 10 participants will be invested in a professionally managed option by 2023.

Moreover, TDF adoption by Vanguard plan sponsors grew from 75% of plans in 2009 to 93% of plans in 2018. TDFs accounted for 35% of total Vanguard DC plan assets and more than half of total DC plan contributions in 2018, the report notes. 

Auto Enrollment and QDIAs

Not surprisingly, automatic enrollment (AE) and the use of TDFs as a default investment are major factors in the rise of TDFs. Adoption of AE by Vanguard plan sponsors has more than doubled since 2009. By year-end 2018, nearly half (48%) of Vanguard plans had adopted AE, with half automatically enrolling both already eligible nonparticipants and newly eligible participants.

For plans with more than 1,000 participants, more than two-thirds had adopted the feature by 2018, and among all Vanguard participants, 6 in 10 were in plans with automatic enrollment, the report notes. 

The report further shows that 90% of all Vanguard plans had selected a target-date or balanced fund as a default investment by year-end. Among plans designating a QDIA, 97% of the QDIAs were target-date options and 3% were balanced funds. And nearly all plans (98%) with AE are using TDFs as their default fund, the authors note. 

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