Defined contribution plan participants who hold a target-date fund along with other investments in their accounts might not be misusing or misunderstanding this option. Their mixing of investments can reflect a specific investment strategy, new research from Vanguard Group Inc. finds.
“We don't necessarily agree” with some DC industry members who say participants only need one target-date fund in their accounts, said Cynthia Pagliaro, senior research analyst for Vanguard's Center for Investor Research in Malvern, Pa. In many instances, participants who mix a target-date fund and other options “seem to be conducting reasonable investment practices,” she said.
To be sure, as target-date funds have grown in popularity, the percentage of pure target-date investors — those DC participants relying solely on a single target-date fund — has grown compared to what Vanguard calls mixed target-date investors. The split between the two groups was 50%-50% in 2010 among plans that offered target-date funds, Ms. Pagliaro said. By year-end 2015, the pure vs. mixed split was 62%-38%, according to the latest available data from Vanguard clients. Vanguard analyzed data from 3.8 million participants in approximately 1,650 plans offering target-date funds.
The growth in pure target-date fund investing is due primarily to plans' use of auto enrollment, placing participants in a target-date fund as aqualified default investment alternative and to new plan participants choosing a target-date fund, she said.
Vanguard's analysis is contained in a research report — co-authored by Ms. Pagliaro and Stephen Utkus, principal and head of the Center for Investor Research — that was issued in January. It examined off-the-shelf target-date funds offered by Vanguard and other providers.