The evolution of 401(k) plan designs has resulted in a significant increase in the use of balanced funds, including target-date funds (TDFs), by recently hired 401(k) plan participants in 2013 compared with recently hired participants 15 years ago.
A report by the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI) finds nearly two-thirds of recently hired 401(k) participants were invested in balanced funds at year-end 2013, compared with less than one-third of recently hired participants at year-end 1998.
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In addition, among recent hires investing in balanced funds, more than three-quarters had invested more than 90% of their 401(k) account in balanced funds at year-end 2013.
“These data suggest that regulatory changes have helped make it easier for employers to design their plans to cater to the wide array of 401(k) plan investors, ranging from folks who want to do it themselves—constructing a portfolio from the investments offered—to those who are invested in target-date funds for professional asset allocation, diversification and rebalancing over time,” notes Sarah Holden, ICI senior director of retirement and investor research. “This evolution in plan design has resulted in increased diversification across asset categories, on average, for 401(k) plan participants.”
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TDFs have played a large part in the increased role of balanced funds. At year-end 2013, recently hired 401(k) plan participants had 41% of their 401(k) plan assets invested in balanced funds, with 32% invested in TDFs.
The research finds that, overall, across the entire 26.4 million 401(k) plan participants in the EBRI/ICI 401(k) database, TDFs represented 15% of plan assets, and 41% of 401(k) plan participants overall held TDFs.
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“Target-date funds provide a convenient investment choice for 401(k) participants to automatically diversify at least a portion of their retirement portfolios and maintain age-appropriate asset allocations even during volatile financial markets,” says EBRI research director Jack VanDerhei.
“The growing use of these funds in recent years, especially among new 401(k) participants, has been accompanied by a marked decrease of young participants with zero equity exposure,” he adds. “The increased use of target-date funds has also been associated with a decrease in older participants with high concentrations in equities as well as a continued reduction in the allocation to company stock among 401(k) participants.”