TDFs Help Boost Balances

Target-date funds (TDFs) have been touted as an investment ideal for participants who want to “set it and forget it.” They have gathered incredible assets since the start of their widespread adoption as a qualified default investment alternative (QDIA) over a decade ago, that growth aided by automatic enrollment. Those assets flowing into the funds as a default coincided with the Great Recession of 2008 and the bottoming out of the market in March 2009.

Fidelity Investments examined the balances of participants who had remained invested in their 401(k) plan in the decade following the recession. The combination of strong market returns—the Standard & Poor’s (S&P) 500 index delivered a 10-year annualized total return of 17.8% since the market’s nadir—and auto-enrollment led to impressive growth. Overall, average balances soared 466%, from $52,600 in the first quarter of 2009 to $297,700 in the first quarter of 2019.

In periods of volatility, the common wisdom is to encourage participants to stay the course—to encourage continued investment in the target-date fund, for example.

Among Millennials and Generation X, the account balance growth well exceeded the average. Millennials’ balances rose 1,762%, from $7,000 to $129,800. Gen Xers’ balances rose 626%, from $37,000 to $268,900. Baby Boomers’ balances rose 367%, from $76,500 to $357,200.

Fidelity also looked at how different generations fared if they had remained invested for 15 years. Boomers’ balances reached $430,500, while those of Gen Xers reached $347,200 and Millennials, $152,400.

When examining use of TDFs in the past 10 years, Fidelity found that, in 2009, 16% of individuals had all of their savings invested in a TDF. By the first quarter of this year, that had risen to 52%. In addition, only 7% individuals had all of their savings in stocks, down from 15% 10 years prior.

“When I think about the onus of American workers having to save from their paycheck for their own retirement, despite market volatility, people are staying the course, saving more and taking advantage of the match, which is fantastic news,” says Katie Taylor, vice president of thought leadership at Fidelity Investments in Boston.

When the market is uncertain, agents at Fidelity’s call center tell investors to focus on the risk tolerance appropriate for their age and their long-term goals, and, as a result, they seldom change their allocations, Taylor says.

401(k) TDF Assets