EBRI: Target-Date Glide Paths Should Match Plan Demographics

The study focused only on pure target-date fund holders, defined as plan participants for which target-date funds account for 90% or more of their account balances, which was 33% of those using target-date funds in the sample. EBRI found those in plans dominated by participants with high incomes tend to hold target-date funds with higher equity allocations than those in the plans dominated by participants with low income.

However, the differences in equity allocations between the two groups were small (on average one to three percentage points).

When plans are classified by participants’ tenure, the average equity allocation of pure target-date fund holders by age and salary shows a different pattern from target-date investors in plans classified by participants’ income. Participants in plans dominated by those with long tenure tend to hold target-date funds with higher equity allocations than participants in plans dominated by those with short tenure, up to age 49, but at age 50 and older, a change occurs.

EBRI concluded that regarding equity allocations of pure target-date fund holders, participants’ age drives changes, but salary does not. In a given age group, the equity allocation of target-date fund holders varies little with respect to salary, and this is consistent regardless of their plans’ demographics.

When participants are in plans dominated by participants with low income and short tenure, the lower equity allocations might be related to their having less “risk capacity” perhaps because their income over a lifetime working career is less predictable, EBRI said. However, it may also result from the selection of target-date funds by plan sponsors.

Contribution Rates Still Drive Retirement Success

EBRI concluded from its research that although target-date funds with different equity glide paths affect participants’ retirement success rate, participant contribution rates (corresponding to different plan demographic characteristics) have a stronger impact.

The research found that participants in plans dominated by participants with high income tend to contribute, on average, more than participants in the plans dominated by those with low or middle income. The difference is about three to four percentage points between the plans dominated by those with low income and the plans dominated by those with high income.

EBRI also found that participants in plans dominated by participants with long tenure tend to contribute more than those in plans dominated by short-tenure participants, with an average difference of about one to two percentage points.

Participants in plans dominated by both low income and short tenure participants tend to contribute about two to four percentage points less than those in the plans dominated by both participants with high income and long tenure. The research report said that for example, participants ages 45 to 49, with a salary of $60,000 to $80,000, in a plan dominated by those with low income and short tenure, tend to contribute on average 2.2 percentage points less than those of the same age and salary in a plan dominated by high-income and long-tenure participants.

Just as the research found target-date investors tended to shift to funds with higher equity allocations as they got older, it indicated participant contributions also increase sharply after age 50. That may be due to the catch-up contribution allowed for participants age 50 and above.

The research concluded that plan demographics significantly affect participants’ saving behavior, as peer effects do.

Whatever the reason, again in these plans, EBRI found a change occurred as participants got older. At age 55 and older participants in plans dominated by those with low income and short tenure tend to hold target-date funds with higher equity allocations, perhaps because they want to take a little more risk in an effort to increase their account balances as retirement nears.

EBRI said its findings suggest plan demographics should be taken into account when examining the impact of different equity glide paths on participants’ retirement success rate.

The May 2009 EBRI Issue Brief is available here.