EBRI Issue Brief

Target Date Funds: Evidence Points to Growing Popularity and Appropriate Use by 401(k) Plan Participants

Sep 9, 2021 21  pages

Summary

Since 1996, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) have worked together on collecting and analyzing annual data on millions of 401(k) plan participants’ accounts. This report analyzes 401(k) plan participants use of target date funds using year-end 2018 data from the EBRI/ICI 401(k) database. 

For all of the figures in this report, components may not add to the totals presented because of rounding.

Key Findings:

  • Target date funds have grown in popularity. At year-end 2018, more than half (56 percent) of 401(k) participants in the EBRI/ICI 401(k) database held target date (or lifecycle) funds. Target date fund assets were more than one-quarter (27 percent) of 401(k) plan assets in the database. 
  • Target date funds offer professional management of a diversified portfolio that rebalances over time. The EBRI/ICI 401(k) database has information on 401(k) plan participants’ holdings of target date funds, whether structured as mutual funds, collective investment trusts, or separate accounts. Target date funds offer a complete portfolio for investors. A target date fund holds a diversified portfolio of both stocks and bonds and also rebalances to become less focused on growth and more focused on income as the fund approaches and passes the target date.
  • Younger 401(k) participants are more likely to hold target date funds than older participants. At year-end 2018, 62 percent of 401(k) plan participants in their twenties held target date funds, compared with 50 percent of those in their sixties. Similarly, 51 percent of 401(k) plan assets of participants in their twenties were invested in target date funds, compared with 23 percent among those in their sixties.
  • Overall, 401(k) plan target date fund investors had slightly higher allocations to equities compared with 401(k) plan participants not holding target date funds. 401(k) plan participants often tend to invest in equities through equity funds or the equity portion of target date funds, and also through company stock and the equity portion of non-target date balanced funds. At year-end 2018, overall, 401(k) plan target date fund investors had 66 percent of their 401(k) plan assets invested in equities, compared with 60 percent for 401(k) plan participants not holding target date funds. The youngest 401(k) plan target date fund investors had the highest allocation to equities compared with their counterparts not holding target date funds. Older 401(k) plan participants had similar allocations to equities whether they were target date fund investors or not.  
  • Younger 401(k) plan target date fund investors hold a higher concentration of their accounts in target date funds than older 401(k) plan target date fund investors. At year-end 2018, 88 percent of 401(k) plan participants in their twenties holding target date funds held more than 90 percent of their accounts in target date funds. About two-thirds of 401(k) plan target date fund investors in their fifties and sixties had such a high concentration.  
  • The vast majority of 401(k) participants investing in target date funds hold one target date fund. Ninety-four percent of 401(k) participants owning target date funds held one target date fund at year-end 2018, with little variation by participant age. Ninety-seven percent of 401(k) plan participants in their twenties holding target date funds held one, compared with 93 percent of 401(k) plan target date fund investors in their fifties or sixties.  
  • 401(k) participants holding target date funds typically are invested in target date funds appropriate to their age. For example, among 401(k) plan participants holding one target date fund, 91 percent of those in their twenties held a target date fund appropriate to their age, similar to those in their fifties. Nine percent of those in their twenties held a fund with an earlier target date (making them young for the fund), compared with 5 percent of those in their fifties. The remaining 2 percent of those in their fifties held a fund with a later target date (making them old for the fund). Overall, among 401(k) participants with target date funds, the vast majority (88 percent) held one age-appropriate target date fund.
  • Target date funds held in 401(k) plans tend to be held by appropriately aged 401(k) plan participants. For example, 83 percent of 401(k) plan participants holding 2040 target date funds had ages in line with reaching age 65 around 2040, while 96 percent of 401(k) plan target date fund investors in the 2035 funds were appropriately aged.