Tuesday, December 8, 2009

EBRI Releases Brief on Target Date Funds

Investment Behavior of Target-Date Fund Users Having Other Funds in 401(k) Plan Accounts

WHY TARGET-DATE FUNDS ARE IMPORTANT: Target-date funds (TDFs) are designed to simplify retirement plan asset allocation as an “all-in-one” investment option, which automatically rebalances the account to a mix of asset classes that are more conservative as the investor ages. Because of recent legislative and regulatory inducements, they are rapidly growing as an investment in 401(k) retirement plans, and about 7 percent of all 401(k) assets are currently invested in TDFs.

MIXED TDF USERS: As TDFs grow, a new class of 401(k) investor is emerging: “mixed” target-date fund users who hold the funds in combination with other non-TDF funds in the plan menu.

LACK OF UNDERSTANDING OF TDFS: This study shows that some mixed TDF investors apparently fail to understand either the purpose or the benefit of a TDF designed as an “all-in-one” portfolio solution. However, holding TDFs with other funds could lead to an unexpected result of ending up with a potentially inferior portfolio in terms of risk/return tradeoff from more assets allocated to some sectors than the designers of the target date funds had planned.

December 2009, Vol. 30, No. 12
Paperback, 16 pp.
PDF, 707 kb
Employee Benefit Research Institute, 2009

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