Target-date funds are increasingly popular with 401(k) plan participants who are looking for professional help with managing their retirement funds.
More 401(k) plan participants are making a date with target-date funds (TDFs), according to a new study by the Employee Benefit Research Institute (EBRI). A third of all 401(k) plan participants used TDFs in 2009, up from 25 percent in 2007 and 31 percent the next year. TDFs have become a popular choice for the default fund when 401(k) plans have an auto-enrollment feature, the EBRI report states. “Consequently, younger participants, participants with lower account balances, and participants with shorter tenure at their current job have been found to be more likely to use them.”
A more recent study of nearly 2,600 plan participants conducted earlier this year by Millionaire Corner confirms that these asset allocation funds have become more prominent in 401(k)s. Nearly three-quarters (72 percent) of plan participants surveyed said that either target-date or lifestyle funds are available in their plans, up from 59 percent availability in 2008.
A TDF is an example of an asset allocation fund, which provides 401(k) plan participants with the diversity and risk management recession-battered investors may appreciate. Asset allocation funds ideally generate consistent returns through investment in a mix of stocks, bonds, and cash. A balanced fund is the most basic type. It traditionally offers a fixed allocation of about 60 percent stocks and 40 percent bonds.
A TDF helps investors save toward a life, or horizon, event within a specified period of time. Examples include buying a home, college, and retirement. It is generally more aggressive in the early stages, and as the event nears, and preserving capital takes on more importance to achieve one’s financial goal, the fund will shift to safer, more conservative investments.
One reason that investors opt for a TDF is that they prefer to let a professional money manager make their allocation decisions, according to our study. Investors hand over control of their TDF to a fund manager, who is free to revise investment formulas throughout the lifetime of the fund. TDFs are not a guarantee that investors will have enough money to meet their retirement needs and they do not relieve investors of the responsibilityof monitoring the fund activity and performance.
Another reason, closely related, is that “it’s easy.” This would make them perfect for an Advisor-Dependent investor, or one not interested in being involved in the day-to-day management of their investments.