Participants with Single TDFs Expected to Dominate by 2022

Target-date funds have continued to reshape the investment patterns of retirement savers and are now expected to make up the vast majority of DC plan investments in less than five years, new research shows.

According to Vanguard’s annual DC benchmarking report, “How America Saves 2018,” more than half of 401(k) participants are invested in a single TDF, compared to only 13% just 10 years ago, and researchers estimate that level will rise to 77% of participants by 2022. The 17th edition of the report reviews the retirement savings behavior of 4.6 million participants in DC retirement plans for which Vanguard provides recordkeeping services.

With the advent of TDFs, 75% of all participants now have broadly diversified portfolios — up from only half 10 years ago, the report notes. Correspondingly, the rate of participants holding concentrated stock positions fell by half during the same timeframe. However, the report notes, there are still about 10% of participants who tend to hold extreme allocations (0% or 100% equities).

Auto Features Key

The rise of TDFs has been driven by the adoption of automatic enrollment, which has tripled in the last decade to nearly half of plans (46%), according to the report. Plans with automatic enrollment have an overwhelming 92% participation rate, compared to 57% for plans with voluntary enrollment.

Overlapping with the improvements in portfolio construction is the rising prominence of professionally managed allocations, the report notes. At year-end 2017, nearly 6 in 10 Vanguard participants were invested solely in an automatic investment program, compared with just 1 in 10 at the end of 2003 and 2 in 10 at the end of 2007.

Vanguard further emphasizes that when automatic features were first introduced, many plan sponsors set low default rates in an attempt to prevent opt-outs, but half of plans now default participants in at a rate of 4% or higher, up from just a quarter of plans 10 years ago. Moreover, of those plans with automatic enrollment, two-thirds have also implemented automatic escalation.

The authors note that automatic increases have helped to narrow the gap between deferral rates for participants in voluntary plans versus automatic enrollment plans to just 0.3 basis points. When both employee and employer contributions are taken into account, the average savings rate of 10.5% has held fairly steady over a 15-year period.

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