While almost all employers offering retirement plans include the investment options in their plan lineups — and usually as the default investment option — the percentage of assets workers actually invest in the funds varies widely.
For example, in its latest survey of the 1,000 largest U.S. retirement plans, Pensions & Investments found that among the 50 largest defined contribution plan sponsors that reported target-date fund assets, the percentage of total plan assets held in target-date funds ranged from 5.9% to 64.4%.
For industry professionals, the seemingly insignificant little number can often open a big window into the stories of the companies offering the plans and their workforces. Plans with a high percentage of assets in target-date funds — those with high participant use of the funds — tend to be younger companies with younger employees. Those with a low percentage, in contrast, are more likely to be older, more mature organizations with older workers, many of them retirees, according to industry experts.
Companies dating back to the '70s and '80s that have "mature plans" tend to have many older workers and retirees who are unlikely to use target-date funds because they entered the workforce before the investment products even existed, said Greg Ungerman, Callan's defined contribution practice leader.
These older participants, who might hold as much as 60% of plan assets, "have been doing it themselves from the get-go" and never needed a "do-it-for-me option like a target-date fund," he said.
David O'Meara, senior director and head of defined contribution investment strategy at Willis Towers Watson, echoed similar views. More mature populations that have been in the workplace longer tend to be more likely to self-select their investments, he said.
"They have more experience in investing their own money and oftentimes will not be in the target-date fund," O'Meara said.
Not only that, he added, older participants are also the ones with the highest balances, which reduces the plan assets that would otherwise be in target-date funds.
The observations bear themselves out in P&I's data. Among the 50 largest DC plan sponsors that reported target-date assets, the one with the lowest participant uptake of the products was the State University of New York, a large system of New York public colleges and universities founded in 1948. The system's combined $24.6 billion held in three defined contribution plans had only 5.9% in target-date funds.
The one with the highest uptake was a younger entity: CommonSpirit Health, a nonprofit hospital chain founded in 2019, made up of entities that opened operations in 1986 and 1996. Its $16.9 billion 403(b) plan had the bulk of its assets, 64.4%, in target-date funds.
Interestingly, an analysis of the Form 5500s of five of the largest technology companies — Alphabet, Amazon, Apple, Meta (formerly Facebook) and Microsoft — adds support for the premise that younger companies are more likely to have higher allocations to target-date funds. Among the five tech giants, the oldest, Microsoft – founded in 1975 – had the lowest allocation to target-date funds. Its $42.6 billion 401(k) had just 28% of its assets in the funds. Microsoft's younger rivals — Apple founded in 1976, Amazon founded in 1994, Meta founded in 2004, and Alphabet (Google founded in 1998) — each had higher allocations of 44.6%, 59.6%, 66% and 64%, respectively.
P&I used the tech companies' Form 5500s as of Dec. 31, 2022, to calculate the target-date fund percentages. None of the companies completed P&I's survey.
Industry experts agree that there isn't anything inherently bad about low participant uptake, saying that usage of the funds is merely a reflection of workforce dynamics and plan design.
There is "no particular range that you would like your target-date funds to be in," said Rob Austin, head of research at Alight Solutions. "Some plans might have very large target-date percentages and other might have lower. I don't think there's necessarily a good estimate for where you should be."
Plans with low participant use of target-date funds can indicate that they either don't automatically default employees into the investment options or they started to do so late.
For plan sponsors that chose target-date funds as the qualified default investment option after 2007 or 2008, when doing so became popular, "it stands to reason that they would be much further behind" in the amount of total plan assets invested in target-date funds, Callan's Ungerman said.
Willis Towers Watson's O'Meara agreed, saying that plan sponsors that designated target-date funds as the QDIA 10 years ago, rather than 15 years ago, would likely see lower adoption of the funds among participants.
"We have seen that it takes time for those assets to build up from those new hires to be defaulted in and accumulate a balance over time," O'Meara said.
Alight's Austin added that low participant use of target-date funds could also indicate that the plan sponsor has a defined benefit plan that participants are relying on.
For people with a defined benefit plan, the target-date fund may not be the right investment because it's designed to be for someone who has the bulk of their retirement assets in the defined contribution plan, he said.
Austin explained that participants with a larger pool of assets in a defined benefit plan might opt not to invest in a target-date fund because they are looking to invest more conservatively or aggressively than they otherwise would with the target-date fund.
"People will view their defined benefit pension plan as almost a fixed income-type fund because you know it's going to be there," Austin said. "It's steady, it's not as volatile."
If participants don't want to take on additional risk, they might opt to put all their savings in a defined contribution plan into something more stable, such as a stable value or money market fund, rather than a target-date fund.
"They might think to themselves, 'I don't need to take on a volatile stock market. I can put everything in stable value, put everything in bonds, and that with my defined benefit plan will get me to a very adequate retirement,'" Austin said.
Regardless of whether participant use of target-date funds is low or high, industry experts urge plan sponsors to make sure that participants are aware of target-date funds and how they work. Sometimes, they say, participants use the funds incorrectly by choosing multiple vintages of the funds or pairing them with other investments when they should, in most cases, be used as a single "all-in-one" investment.
Participant education around target-date funds should be as user-friendly as possible, O'Meara said.
"It's important for those communications to be written in a way such as not to explain how the engine works, but how they're to use it," he said. "Too often our communications that go out to employees share all of the details that an investor may want to know, and in doing so can miss the forest for the trees and not communicate at the level that most participants are able to understand and really take action."