Target date funds (TDF) have proven to promote better participant behavior in times of market turmoil, something 401(k) advisors are watching.
“We heard around 1999 and 2000 how supposedly 401(k)s were deficient, investors would be the first to crack, that the savings vehicle wasn’t structured properly and it wouldn’t hold up,” John Rekenthaler, Morningstar’s vice president of research, said. “But the opposite was actually true. TDF’s were strongly positive through 2008 and 401(k) investors stayed put more so than other types of investors.”
It’s just one reason for their stratospheric rise, especially since the passage of the Pension Protection Act of 2006, which designated target date funds as a qualified default investment alternative (QDIA).
“In 2006, 32% of large 401(k) plans offered target date funds,” according to the Investment Company Institute and BrightScope.
In the ensuing decade through 2016 (which included the financial crisis), “that number had risen to 80% of plans. Similarly, the percentage of participants that were offered target date funds increased from 42% of participants to 83% between 2006 and 2016.”
[Related: What to do About ‘Forgotten’ 401k Target Date Fund Participants]
Company-specific research is just as compelling, with the latest benchmark report from T. Rowe Price reporting that plan adoption of target date products reached an all-time high among its 2 million participants for the second year in a row in 2018, up from 94% to 95%.
Referring to the target date “norm,” the Baltimore-based investment behemoth noted that, “Participant usage increased across all age groups, although investment is highest among younger workers. The percentage of participants who invest their entire balance in a target date product grew by over 20% from 2014 to 2018 (48% to 58%).”
Vanguard’s bellwether benchmark report, How America Saves, found much of the same, adding that nine in 10 plan sponsors offered target date funds at year-end 2018, up one-third over the previous decade when compared with year-end 2008. Nearly all Vanguard participants (97%) were in plans offering target date funds, and 77% of all participants use target date funds.
“An important factor driving the use of target date funds is their role as an automatic or default investment strategy,” Vanguard explained. “The qualified default investment alternative (QDIA) regulations promulgated under the PPA continue to influence the adoption of TDF. That said, voluntary choice is still important, with nearly half of single target date investors choosing the funds on their own, not through default.”
Phenomenal Forward-Looking Fund Use
Not surprisingly, the wild run target date funds are experiencing is only likely to continue, due mainly to an increase in the number of target date options.
