Target-date funds are often credited with better investing behavior on the part of participants, ensuring they get—and stay—invested in good markets and bad.
But a new report has some surprising findings, namely that people who use target-date funds contribute less than people who don’t use them.
“Even when accounting for factors like age and automatic enrollment, people who fully invest in target-date funds tend to save less than others,” according to health, wealth and HR service provider Alight Solutions.
The comprehensive study of approximately 2.5 million target-date fund investors, found that on average, full target-date funds investors contribute 6.2%, compared to 8.4% for other investors, the Lincolnshire, Illinois-based firm said.
Other TDF surprises
Other interesting findings include:
- People don’t stay invested in TDFs for very long. Half of people who were fully invested in them ended up switching out of them within 10 years.
- TDF use is impacted by what other investment funds are available. When companies offer more funds outside of target-date funds, people are less likely to use target-date funds as intended.
- When people stop using TDFs, many make extreme changes to their asset allocation. Among those who stopped using TDFs altogether, 46% invested their entire portfolio in equities, while 14% went all-in on fixed income.
- Investing in multiple TDFs is common. One out of every 10 TDF investors uses more than one vintage. Among partial TDF users, the percentage more than doubles.
As of June 30, 2019, target-date mutual fund assets totaled $1.3 trillion, up 4.1% from the end of March, according to the Investment Company Institute.
Retirement accounts held the bulk (87%) of target-date mutual fund assets, with 68% held through defined contribution retirement plans and 19% held through IRAs.
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.