“We anticipate that by 2023, eight in 10 Vanguard participants will be solely invested in an automatic investment program,” Vanguard wrote.
“These numbers will likely continue to grow as new employees enter the workforce and are defaulted into a target date investment by their plans,” T. Rowe concurred, adding that the availability of set-it-and-forget-it target date products might be leading to fewer participants seeking investment guidance.
“Respondents to T. Rowe Price’s participant surveys reported that while most participants turn first to their 401(k) provider for financial advice, only 21% want investment help.”
Potential Participant Problem
Of course, the product is not without controversy. Debate has long raged over the TDF’s role in the portfolio, and whether including other target date funds—and/or completely different investment vehicles—reduces the effectiveness of the retirement plan overall. It’s something with which the industry wrestles, especially one that’s consistently preached the benefits of diversification (by asset class and product type) and the dangers of concentrated positions and portfolios. But for many, it doesn’t appear to be an issue.
“Two-thirds of participants owning TDF have their entire account invested in a single target date fund,” Vanguard found, and “52% of all of its participants are wholly invested in a single target date fund, either by voluntary choice or by default.”
A Mixed Message
Nonetheless, David Blanchett, Morningstar’s head of retirement research, recently attempted to settle the question once and for all.
“There are potentially over 10 million participants in defined contribution plans today combining a TDF with other plan investments, commonly referred to as ‘mixed target date fund investors,’” Blanchett wrote in a research report last summer titled, “Mixed Target date Fund Investors: Is There a Method to the Madness?”
“TDF are best used as an ‘all or none’ investment option since mixing target date funds with other plan investments significantly diminishes, and potentially eliminates, their value,” he added.
Blanchett argued that participants who require a more aggressive allocation are “better off moving along the target date fund glide path” to a year with a higher risk level, rather than mixing in other equity or bond funds.
He also found the typical mixed TDF investor had attributes that would suggest “they are more sophisticated than investors who use the default investment (for example, they have higher salaries and higher balances), but less sophisticated than participants self-directing their accounts and not using target date funds.”
