A recent study by the investment management company Vanguard Group found that almost one in four 401(k) participants are investing in only target-date funds, a six-fold gain over the past five years. The increase reflects a growing number of new participants: Vanguard said that of those employees entering a retirement program for the first time, 64 percent opted to invest in a single target-date fund.
Target-date funds are a type of mutual fund that allows investors to set a date for the life of the fund. As retirement approaches, the fund shifts its emphasis from more aggressive investments to more conservative ones based on the target date.
Many companies are choosing target-date funds as a default investment option, and automatically enroll eligible employees into them if an individual doesn’t voice a preference. In general, Vanguard said that the move to target-date funds illustrates how there is growing reliance on “professionally managed accounts” in which a fund manager or third-party advisor makes portfolio allocation and rebalancing decisions on investors’ behalf.
“We view this trend as extremely positive because TDFs are providing an increasing number of participants who are neither engaged nor sophisticated investors with balanced, well-diversified portfolios, as well as reducing the risks associated with extreme equity allocations,” Jean Young, the study’s author and an analyst in Vanguard’s Center for Retirement Research, said in a statement.
According to Vanguard, target-date investors cannot hold “extreme” positions because their options include both equity and fixed income asset classes. Last year, about 18 percent of Vanguard participants held extreme allocations, down from 35 percent in 2004, when target-date funds first became available in Vanguard plans.
In five years, Vanguard estimates that 55 percent of all participants, and 80 percent of new participants, will be invested in a professionally managed investment option, which also may include a single traditional balanced fund or a managed account advisory service.
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