More Choose TDFs for the Long Run

At year-end 2012, 41% of 401(k) participants held target-date funds, according to “401(k) Plan Asset Allocation, Account Balances and Loan Activity in 2012,” a report jointly released by the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI).

This figure represents an increase from 39% in 2011 and 19% in 2006. In addition, 15% of the assets noted in an EBRI/ICI database covering 401(k) plans were invested in target-date funds at year-end 2012, up from 13% in 2011 and 5% in 2006.

The report notes that at year-end 2012, 61% of 401(k) plan participants’ accounts were invested in equities—through equity funds, the equity portion of target-date funds, the equity portion of balanced funds, and company stock. The report shows younger 401(k) plan participants had higher concentrations in equities—nearly three-quarters of 401(k) assets among participants in their 20s or 30s—compared with older participants. Participants in their 60s had less than half of their 401(k) assets invested in equities.

“Fears that retirement savers would abandon equities in the wake of the financial crisis have not been borne out by the data,” says Sarah Holden, ICI senior director of retirement and investor research. “And, target-date funds are playing an important role for 401(k) investors, particularly for younger participants, by maintaining age-appropriate concentrations in equities.”

Data from the report indicates that target-date fund use varies with age. Younger participants, for example, are more likely to hold target-date funds and such funds tend to represent a much larger share of their 401(k) assets. At year-end 2012, 52% of 401(k) participants in their 20s had target-date funds, with those funds making up 34% of their 401(k) assets.

“More new or recent hires invested their 401(k) assets in balanced funds, including target-date funds,” notes Jack VanDerhei, EBRI research director. “At year-end 2012, nearly 54% of the account balances of recently hired participants in their 20s were invested in balanced funds, compared with about 7% in 1998. A significant subset of that balanced fund category is invested in target-date funds.” The report notes that at year-end 2012, 43% of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 40% at year-end 2011.

The report also shows that at year-end 2012, 21% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from the prior three years (2009 to 2011), although slightly elevated compared with prior to the financial crisis (2006 to 2008).

Age, tenure and a number of other factors impact an individual’s account balance at any point in time, according to the report. In addition, the 401(k) account balance for an individual’s current job was typically found to be just one of a number of retirement resources that he or she will accrue over a working career, including Social Security.

At year-end 2012, the average 401(k) participant account balance was $63,929 and the median account balance was $17,630, with wide variation reflecting the many variables in retirement saving, including participant age, tenure, salary, contribution behavior, rollovers from other plans, asset allocation, withdrawals, loan activity, and employer contribution rates. Older participants and those with longer tenure tend to have higher 401(k) balances at their current employers. For example, at year-end 2012, the average account balance among 401(k) plan participants in their 60s with more than 30 years of tenure was $224,287.

The report is based on data from the EBRI/ICI database of employer-sponsored 401(k) plans. For 2012, the database includes statistical information on 24 million 401(k) plan participants in 64,619 plans, which held $1.536 trillion in assets.

More information about the report can be found in the December 2013 EBRI Issue Brief and the December 2013 ICI Research Perspective.