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CCH® PENSION — 08/17/10

Target date funds most popular among participants who are younger, have shorter tenure, lower balances

The use of target date funds (TDFs) is more likely among participants who are younger, have lower account balances, and have shorter tenure at their current job, according to a study released by Employee Benefit Research Institute (EBRI). The reason for this pattern is that new workers are the most likely to be automatically enrolled in their employer's 401(k) plan, with a target date fund often being the default option, the study reveals. The EBRI analysis also shows that target date users are likely to stick with their fund over time.

Target date funds, also known as "life cycle" funds, are designed to simplify long-term investing by automatically adjusting to more conservative investments as the fund approaches a set date. While their growth has been rapid in 401(k) plans in recent years, the EBRI notes that such funds are still relatively new for most participants. As a result, not much research has been done on how participants use these funds over time. The study focuses on 401(k) participants who were in plans that offered TDFs in 2007 to see whether they remained in TDFs, moved out of TDFs, or moved into TDFs if they were not already using them.

Participants with the lowest salaries were more likely to stay in TDFs and begin using them in 2008, the study found. However, as salaries increased, there was no significant difference in new TDF use. Of those participants in 2007 with 30 or more years of tenure and having some of their account balance allocated to TDFs, 85.8% continued to have some assets in TDFs in 2008. By comparison, of participants in 2007 with two to five years of tenure, 95.5% remained allocated to TDFs in 2008 after having done so in 2007. The average age of those participants using TDFs in 2007 was 43.1 and in 2008 it was 42.4, compared with 45.6 and 46.2, respectively, for those participants not using TDFs. The average age for those using TDFs in both years was 42.9.

Future growth in TDF use expected

The EBRI study found that the share of all 401(k) plan participants using TDFs increased from 25% in 2007 to 31% in 2008. The EBRI said that it expects future growth as the participants in TDFs remain in the funds and as new participants sign up for them voluntarily or through an automatic enrollment default option. Therefore, the EBRI concludes, the design of TDFs (especially the investment allocation "glide path"), as well as participants' understanding of these funds, will become more critical to the future success of 401(k) plans.

Source: EBRI news release, July 15, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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