As target-date funds continue their march to ubiquity in defined contribution plans, some research shows that certain selling points for these options aren't as strong as promoters suggest.
Remember the motto that target-date funds, thanks to their professionally managed glidepaths, let participants "set it and forget it?"
Research by Alight Solutions says participants actually don't stay fully invested very long in target-date funds.
Forty-nine percent of participants who were fully invested in target-date funds were no longer fully invested after 10 years, said a report based on the analysis of 2.5 million target-date fund investors in plans where Alight is the record keeper. The plans had $87.6 billion in target-date assets as of Jan. 1 and total DC assets of $331 billion.
Some investors left target-date funds completely, while others remained partially invested. Alight defines "partially invested" as something less than 100% and more than zero. The average partial investment was 40%.
During that 10-year period tracked by Alight, the number of fully invested participants switching to partial investing outnumbered those quitting target-date funds by a 3-to-1 ratio.
The results were a surprise because "target-date funds are designed to be your only portfolio" in a retirement account, Robert Austin, the Charlotte, N.C.-based director of research, said in an interview.
He speculated that some participants may have applied the old saying of "don't put all your eggs in one basket" to target- date funds, believing that they need more diversification. "To those individuals, it looks like one investment," he said.
The report found that 3% of participants who were fully invested in a target-date series in 2018 put their money in more than one vintage, such as a 2025 fund and a 2040 fund. Among those partially invested, 21% invested in more than one vintage. Two-thirds of the multivintage investors put money in two vintages. The others invested in three or more, including 4% who put their money in nine or more.
This behavior illustrates participants' misunderstanding of target-date funds. An Alight research report published in May 2019 said 59% of participants responded that they didn't know anything about target-date funds. It also said only 14% answered correctly that target-date funds rebalance allocations over time. Only 11% correctly said a target-date fund is designed to be a participant's sole investment.
The latest Alight research, published in mid-October, reported that full investing in target-date funds declined by age in 2018.
For example, 70% of the youngest group (30 and under) was fully invested. That rate declined steadily over four other age groups, culminating with 25% of people 60 years and older being fully invested in target-date funds.
Mr. Austin said these results aren't surprising. "A lot of younger investors probably have similar investing styles," he said. "As people get older there are a lot of variances" in the economic factors affecting their lives.
"Target-date funds based on age may be an oversimplification," he said. "Target-date funds are good, but perhaps not a panacea for everyone."
Alight's research also shows that target-date fund investors contribute less to their accounts than those who don't use them.
These 2018 results held true when Alight controlled for three different approaches — auto enrollment, quick enrollment or self-enrollment. (Alight defined quick enrollment as a plan feature that allows participants to make a decision whether to make quick contributions online or by mail for a preselected savings rate.)
In each category, Alight reviewed results of people who were fully invested, partially invested or not invested in target-date funds. The latter group always contributed the most, followed by the partially invested and then the fully invested. For example, among auto-enrolled participants, the average annual contribution rates were 7.6% for non-investors, 7% for partial investors and 5.3% for full investors.