Defined contribution plan participants' investments in target-date funds and the number of such offerings both significantly increased in 2011, according to a study of Vanguard DC clients.
Among all defined contribution plans that are clients of Vanguard, 47% of participants had funds invested in target-date funds, with 24% invested in a single target-date fund.
Eighty-two percent of the plans offered a target-date fund last year, compared with 79% in 2010 and 13% in 2004, a year after Vanguard first offered the option to plans.
New participants to a DC plan have a considerably higher target-date participation rate than existing participants, with 64% of first-time participants investing in a single target-date fund in 2011, but many employees that have been enrolled before the target-date funds were offered are now choosing that option, said Jean Young, author of the study and senior research analyst in Vanguard's Center for Retirement Research.
Ms. Young said target-date funds have grown more popular because “we reached an acknowledgement that even with how fantastic our education programs are, you can't teach everyone investment skills,” Ms. Young said in a telephone interview. “We need some solutions that are going to help participants, and target-date funds are that solution.”
Rising target-date fund participation has also led to greater use of professionally managed account options. One-third of Vanguard participants are invested in either a single target-date fund, single traditional balanced fund or a managed account advisory service.
Ms. Young estimates 55% of all participants and 80% of new participants will be invested in professionally managed accounts within the next five years.
The study covered 3.2 million participants in 2,000 Vanguard DC client plans.
Vanguard had $100.4 billion in target-date funds under management, according to the company.