Youth is wasted on the young, but not in target date funds.
A joint study from the Investment Company Institute and the Employee Benefit Research Institute reports that younger 401k plan participants have large allocations to target date and other types of balanced funds.
At the end of 2016, the most recent year analyzed, 64 percent of 401k participants in their twenties held target date funds, compared with 45 percent of 401k participants in their sixties.
The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2016,” shows that among recently hired participants (those with two or fewer years of tenure) target date funds are used at a higher rate—59 percent—compared with 52 percent of all 401k plan participants who invest in those funds.
“Target date funds continue to be a widely available, widely used, popular, and convenient investment choice for retirement savers, as they offer portfolio diversification and automatic rebalancing over time,” Sarah Holden, ICI senior director of retirement and investor research, said in a statement. “Recently hired workers, in particular, often hold target date funds in their 401k plan accounts, reflecting current 401k plan design.”
The new study also shows that more 401k plan participants hold equities than before the financial crisis of 2008.
About 67 percent of 401k assets continued to be invested in stocks in 2016, through equity funds, the equity portion of balanced funds, and company stock.
An additional 27 percent of 401k assets were in fixed-income securities such as stable value investments, bond funds, money funds, and the fixed-income portion of balanced funds.
In 2016, only 7 percent of 401k plan participants in their twenties had no equities, while 77 percent of these younger plan participants had more than 80 percent of their account balances invested in equities.
In comparison, 11 percent of 401k plan participants in their sixties had no equities, while 19 percent of them had more than 80 percent of their account balances invested in equities.
Other findings in the study include:
Average 401k account balances increase with participant age and tenure. For example, at year-end 2016, participants in their forties with more than two years and up to five years of tenure had an average 401k balance of about $38,000, while participants in their sixties with more than 30 years of tenure had an average 401k account balance of more than $287,000.
401k participants’ investment in company stock continued at historically low levels. Only 6 percent of 401k plan assets were invested in company stock at year-end 2016. This share has fallen by more than two-thirds since 1999, when company stock accounted for 19 percent of assets.
401k participant loan activity edged up slightly at year-end 2016 compared with year-end 2015. At the end of 2016, 19 percent of all 401k participants who were eligible for loans had loans outstanding against their 401k accounts, slightly up from 18 percent at year-end 2015.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.