Target-Date Funds Will Garner Majority of 401(k) Contributions by 2018

Target-date funds continue to gain ground in the employer-based retirement plan arena. It is estimated that by 2018, they will garner more than 63% of total defined contribution plan participant contributions and account for 35% of total 401(k) plan assets.

A new study by Cerulli Associates reported these findings and revealed other key trends influencing target-date funds’ popularity. For instance, 84% of plan participants cited the risk management and asset allocation features of the funds as being “very important,” while 42% were attracted to target-date funds’ built-in diversification qualities.

By definition, target-date funds are mutual funds that automatically reset their asset mix of stocks, bonds, and cash equivalents to maintain a risk profile that is appropriate for a particular investor’s “target date” for withdrawals, such as retirement.

Over the past several years target-date funds have enjoyed a rapid ascent in the defined contribution plan space, surging from less than $100 million in total assets in 2005, to more than $500 million in 2013. And within the fund category, those funds that track indexes are gaining in popularity, growing from less than 4% of total target-date fund assets in 2003 to 32% a decade later.

Young investors, in particular, are attracted to the turnkey, “no fuss” features of target-date funds. Among retirement plan investors in their 20s, target-date funds assume an average allocation of about 34% of their overall plan portfolio, while plan participants in their 60s choose to allocate just 12.5% of their defined contribution plan portfolios to such funds, according to the Cerulli report.

The study concluded that asset managers must strategize ways to grow their share of target-date assets or risk becoming obsolete in the defined contribution world.

  1. Investment News, “Target date funds to capture 63% of 401(k) contributions by 2018,” March 26, 2014.

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Post by Phil Ratcliff

Phil Ratcliff, President of rebel Financial, is a senior financial advisor that holds an AIF®, CFP®, ChFC®, and CLU® certifications. He started his career at American Express Financial Advisors in 2003, then moved to AXA Advisors for 7 years before founding rebel Financial LLC in 2013.

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