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CCH® PENSION AND BENEFITS — 03/24/09

EBRI sees growth in use of target date funds by 401(k) participants

Over one-third of 401(k) plan participants who were offered target date funds had at least some fraction of their account in such funds in 2007, and this is expected to increase as the push for better diversification of 401(k) participants’ assets intensifies from plan sponsors and policymakers, according to a study published by the Employee Benefit Research Institute (EBRI).

The Pension Protection Act of 2006 (P.L. 109-280) made it easier for plan sponsors to automatically enroll new workers in a 401(k) plan, and target date funds were one of the types of approved funds specified for a “default” investment if the participant did not elect a choice. Target date funds (also referred to as “life-cycle” funds) are a type of mutual fund that automatically rebalances assets following a predetermined reallocation over time. Such funds typically rebalance to more conservative and income-producing assets as the participant’s target date of retirement approaches.

Target date funds were the subject of a recent hearing by the Senate’s Special Committee on Aging. At the hearing, Committee Chairman Herb Kohl (D-WI) cited findings that revealed a wide variety of objectives, portfolio composition, and risk within same-year target date funds. Kohl has urged the heads of the Labor Department and SEC to commence a review of target date funds and begin work on regulatory oversight. The EBRI study noted the controversy over the allocations in target date funds. “[T]here is a growing debate over what the ‘appropriate’ allocation to equities is over the life-cycle of a worker’s career,” the EBRI said, “even though, in many cases, the appropriate allocation would vary for different workers, both across plans and even within a plan.”

Younger workers more likely to invest in target date funds

The EBRI study, published in the March 2009 EBRI Issue Brief , uses the data in the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, which has almost 22 million participants, to examine the choices and characteristics of participants whose plans offer target date funds.

Of the 401(k) plan participants from the EBRI/ICI database who were found to be in plans that offered target date funds, 37% had at least some fraction of their account in such funds in 2007. Target date funds held about 7% of total assets in 401(k) plans.

The EBRI found that younger workers were “significantly” more likely to invest in target date funds than are older workers. Almost 44% of participants under age 30 had assets in a target date fund, compared with 27% of those 60 or older. Target date funds were more likely to be used by those with lower incomes, little time on the job, and with few assets, the study found. On average, target date fund investors were about 2.5 years younger than those who did not invest in target date funds, had about 3.5 years less tenure, made about $11,000 less in salary, had $25,000 less in their account, and were in smaller plans.

The study reported that participants in target date funds were less likely to have all-or-nothing equity allocations relative to those not in the funds. The level of the equity allocation within a target date fund relative to other target date funds of the same year did not appear to have an effect on the percentage of participants investing all their account into that fund. Nevertheless, investors in specific fund families were more likely to invest all of their assets in a single target date fund from that family, the EBRI reported.

Source: EBRI press release #830, March 9, 2009.

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