More 401(k) Savers Go All-In on TDFs
Why hunt for dinner recipes and shop for groceries when you can have a meal kit delivered to your doorstep? Why learn your way around a city when you can use GPS? Why dial someone’s phone number when Siri can do it for you?
Americans love effortless solutions. It should come as little surprise, then, that 401(k) savers are increasingly pressing the “easy button” when it comes to choosing retirement investments.
According to Vanguard’s report How America Saves 2018, three-quarters of 401(k) participants now utilize target-date funds (TDFs). And more than half (51 percent) have invested all of their retirement savings in a single TDF—a staggering figure when compared to the mere 13 percent of participants who were investing this way a decade ago.
And who can blame them? TDFs are an inarguably simple yet effective way to diversify investments. Vanguard’s report notes that they “also help investors ‘stay the course’ with their investment plans,” by deterring trading. Just 2 percent of those using TDFs made investment trades in 2017.
“Target-date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers,” Martha King, managing director and head of the Vanguard Institutional Investor Group, said in a statement. “Many participants lack the time, willingness and expertise to build and manage their retirement portfolios, and TDFs offer a professionally-managed investment option at a very low cost.”
Vanguard researchers foresee TDFs’ popularity continuing to rise. By 2022, they predict 77 percent of 401(k) participants will have their entire account invested in a single TDF.
“When constructing their own retirement portfolios, about 10 percent of participants tend to hold extreme allocations (0 percent or 100 percent equities),” the report noted. “With the advent of TDFs, three-quarters of all participants now have broadly-diversified portfolios—up from only half ten years ago. The rate of participants holding concentrated stock positions fell by half during the same timeframe.”
How America Saves 2018 further highlights the ways in which saving behaviors are getting better thanks to improvements in plan designs. Vanguard pointed out:
- Nearly half of plans have adopted auto-enrollment, triple the amount that included this feature 10 years ago
- Half of plans have a default deferral rate of 4 percent or higher, compared to a quarter of plans a decade earlier
- Two-thirds of plans with auto-enrollment have also implemented auto-escalation
“More people are participating in their employer-sponsored 401(k) plan than ever before, and saving at a healthy rate of about 10 percent,” remarked Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of How America Saves.
“After over a decade of leading this research, it’s gratifying to see meaningful advances in plan design have such a tangible, positive impact on retirement savings for participants,” she concluded.
Jessica Claeys is an editor, writer, and graphic designer, who has been creating both print and digital marketing and communications content for 10+ years.
Jessa Claeys is a licensed insurance producer in the state of Colorado and an insurance editor for Bankrate. She currently covers auto, home and life insurance with the goal of helping others secure a healthy financial future. Jessa has over a decade of experience writing, editing and leading teams of content creators. Her work has been published by several insurance, personal finance and investment-focused publications, including BiggerPockets, 401(k) Specialist, BP Wealth and more.
