VALLEY FORGE, Pa.--(BUSINESS WIRE)--
More than half of the participants in 401(k) retirement plans at Vanguard now hold a target-date fund, giving them a disciplined approach to investment risk-taking that automatically grows more conservative as they age and prevents extremes in asset allocations, Vanguard researchers reported today.
According to Target-Date Fund Adoption in 2013, 86% of 401(k) and other defined contribution plans at Vanguard offered a target-date fund (TDF), 55% of all participants held a position in TDFs, and TDFs accounted for one-third of total plan contributions.
The growing popularity of target-date funds has had a profound affect on the level of risk many participants take with their plan investments. For instance, in 2013, 23% of “do-it-yourself” investors held portfolios at either end of the equity risk spectrum—10% held no equities, thus forgoing the potential return benefits of equities, and 13% held only equities, thus overexposing themselves to the higher risk associated with equities. Those figures contrast with the much riskier behavior seen 10 years ago in 401(k) plans, when 13% of participants held no equities and 22% were entirely invested in equities.
“Target-date funds continue to reshape investment patterns in DC plans in fundamental ways. These funds provide appropriate levels of risk as a participant ages and a remedy to the problem of extreme asset allocations,” said Jean Young, author of the report and a senior analyst in Vanguard’s Center for Retirement Research. “For these reasons, we expect the adoption of TDFs to continue in the coming years.”
Thirty-one percent of all Vanguard participants held a single TDF in 2013, more than double the figure from five years earlier. Among participants entering the plan for the first time, two-thirds were invested in a single TDF.
About half of TDF investors at Vanguard are considered “mixed investors,” meaning they hold a TDF in combination with other investments. In 2013, 46% of all TDF investors fell in this category. Of those, about half became mixed investors as a result of plan sponsor decisions, including employer contributions in company stock or other actions. The other half of mixed investors intentionally constructed a portfolio of both target-date and non-target-date strategies. Many of these participants are pursuing what appear to be reasonable diversification strategies, though they do not fit within the “all in one” portfolio approach of target-date funds.
Although many participants choose to invest in TDFs on their own, a major factor influencing the rise of these funds is their use as a default investment in automatic enrollment plans, in which companies sponsoring workplace retirement plans automatically put employees into their plans and invest their accounts in TDFs. By year-end 2013, 34% of Vanguard plans—covering nearly 60% of all participants—had adopted automatic enrollment, typically for participants newly eligible to take advantage of their plan.
Regardless of whether they use automatic enrollment, 81% of all Vanguard plans used a target-date or balanced fund as a default investment by the end of 2013.
Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies. As of January 31, 2014, Vanguard managed more than $2.4 trillion in U.S. mutual fund assets. Vanguard offers more than 160 index and actively managed funds to U.S. investors and more than 100 additional funds in non-U.S. markets. Vanguard provides investments to nearly 4,000 defined contribution plans, including full-service recordkeeping and investment services to about 3.5 million participants. Vanguard is also a major provider of investment, advisory, and recordkeeping services to defined benefit plans. For more information, please visit institutional.vanguard.com.
For more information about Vanguard funds, visit vanguard.com or call 800-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
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