2 June 2020

Target Date 2.0

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"Target-date funds are a positive for sponsors and participants,” says Jed Petty, CFA and Director of DC Strategies at Wellington Management. “They have come in for criticism recently, but I would argue they are a big improvement over what participants had previously. Often it was 100% stable value, or 100% company stock, or balances spread out across 10 options at 10% each, which is a questionable approach to asset allocation. Compared to where we were before target-date funds, I think they have been a big success.”

According to the Investment Company Institute (ICI), at the end of 2011 target-date funds were offered by 70% of 401(k) plans. But those statistics belie a much bigger shift taking place with respect to age groups. As more plans add target-date funds as their default option—and opt newer employees into those funds—younger participants end up using these vehicles at a higher rate than other participants: the Employee Benefits Research Institute reports that 52% of participants in their 20s invest in target-date funds versus 45% for those in their 40s; and the ICI reports that target-date funds now hold 27% of retirement assets for participants in their 20s— compared to just 9% for participants in their 60s."

“I believe target-date funds are a great solution for many, many participants,” says Wellington’s Petty. “I think what will happen, and what we hope happens over time, is that the construction of target-date funds continues to improve. They are an ideal way to implement more sophisticated investment strategies in a very simple investment vehicle—essentially a great way to implement DB type sophistication in a 401(k) plan for 401(k) plan participants.”

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