Recently Hired 401(k) Plan Participants Likely Choose TDFs

59% of recently hired 401(k) participants held TDFs, compared with 48% of 401(k) plan participants overall, a study found.

Interest in target-date and other types of balanced funds remained strong through 2014, with younger plan participants more likely to hold target-date funds (TDFs) than older participants, according to a new joint study released by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

In 2014, 60% of 401(k) participants in their 20s held TDFs, compared with 41% of 401(k) participants in their 60s.

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The study, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2014,” also found that recently hired participants (two or fewer years of tenure) most likely use TDFs—59% of recently hired 401(k) participants held TDFs, compared with 48% of 401(k) plan participants overall.

“Target-date funds are a popular, convenient investment choice for savers looking for professional asset allocation, portfolio diversification, and automatic rebalancing over time,” says Sarah Holden, ICI senior director of retirement and investor research. “More than 70% of 401(k) plans included target-date funds in their investment lineup in 2014, and recently hired workers, in particular, often invest in these diversified funds.”

Among participants who were offered TDFs, 65% opted to use them.

NEXT: Most 401(k) assets in equities

The study found about two-thirds of 401(k) assets continue to be invested in stocks through equity funds, the equity portion of balanced funds, and company stock in 2014. However, 401(k) participants’ investment in company stock continued at historically low levels. Only 7% of 401(k) assets were invested in company stock in 2014. This share has fallen by 63% since 1999, when company stock accounted for 19% of assets.

An additional 27% of 401(k) assets were in fixed-income securities such as stable value investments, bond funds, and money funds.

“The bulk of 401(k) assets continued to be invested in equities at year-end 2014,” says Jack VanDerhei, EBRI research director. “This is driven in part by younger plan participants, who have higher concentrations in equities. Participants in their sixties remain focused on growth as well, however, allocating 56% of 401(k) plan assets to equity investments.”

In 2014, 8% of 401(k) plan participants in their 20s had no equities, while three-quarters of them had more than 80% of their account balances invested in equities. In comparison, 12% of 401(k) plan participants in their 60s had no equities, while only 22% of them had more than 80% of their account balances invested in equities.

Other findings of the study include:

  • 401(k) participants were slightly less likely to have loans outstanding at year-end 2014 compared with year-end 2013. At the end of 2014, 20% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, down from 21% at the end of 2013.
  • The average 401(k) account balance tends to increase with participant age and tenure. For example, in 2014, participants in their thirties with more than two years and up to five years of tenure had an average 401(k) balance of close to $25,000, while participants in their sixties with more than 30 years of tenure had an average 401(k) account balance of nearly $275,000.

The study is based on the EBRI/ICI database of employer-sponsored 401(k) plans, which includes statistical information about 24.9 million 401(k) plan participants in 81,139 plans, which hold $1.9 trillion in assets and cover 45% of the universe of 401(k) participants.

Full results of the annual EBRI/ICI 401(k) database update are posted on each organization’s website, at www.ebri.org and www.ici.org.

Retirees’ First Priority? Basic Living Expenses

Covering health care costs is their second-biggest concern.

Transamerica Center for Retirement Studies has released a report laying out the top concerns of retirees and how they are faring after the Great Recession of 2008. 

More than half (55%) report lingering consequences of the recession, including those who say they have only somewhat recovered (35%), have not begun to recover (8%) or don’t expect to ever recover (12%). Conversely, 45% said they either have fully recovered or were not impacted.

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“Many American retirees are still recovering from the Great Recession while managing their households with modest retirement incomes,” says Catherine Collinson, president of Transamerica Center for Retirement Studies. “The good news is that most retirees are enjoying life, but the concerning news is that many may be ill-equipped to deal with a financial shock, such as the possible need for long-term care.”

The report, “The Current State of Retirement: A Compendium of Findings About American Retirees,” indicates that retirees’ first priority is just covering basic living expenses, cited by 42%. This is followed by health care expenses (37%), paying down credit card debt (25%), paying off mortgages (21%) and continuing to save for retirement (20%). Retirees’ average income is $32,000. However, for those who are married, it is $48,000, and for those who are single, it is $19,000.

The largest source of retirees’ income is Social Security, cited by 89%, followed by savings and investments (48%), pension plans (42%) and 401(k)s (37%). Those receiving Social Security first applied for the benefit at an average age of 62. Only 1% wait until age 70, the age at which one can receive the maximum monthly benefits.

There is a dichotomy between the percentage of retirees who think they will be able to live comfortably and those who are confident they have built a large enough nest egg. Seventy-two percent are somewhat or very confident they will enjoy a comfortable lifestyle, yet only 42% think their nest egg is adequate. Retirees’ average nest egg totals $119,000; for those who are married, it is $224,000, and for those who are single, it is $40,000.

NEXT: When do people retire?

Fewer than 10% of people retire later than they had planned. Seventy-nine percent of those in their 50s retired sooner than planned. This drops to 67% of those in their 60s and 53% of those 70 or older.

The reasons why folks retire earlier than planned are primarily due to employment-related reasons (66%). This factor climbs to 70% for those 70 or older. However, for retirees in their 50s, 52% said it was due to ill health. Only 12% of retirees of all ages said they left the workforce because they had saved enough.

On average, retirees expect to live another 28 years. Forty-one percent think their retirement years will surpass 30 years. Seventy-percent of retirees say they are in good or excellent health, but for those in their 50s, only 55% agree with that statement.

Retirees are overwhelmingly happy; 94% say they are a happy person and 90% say they are enjoying life. Eighty-four percent have a strong sense of purpose. However, for a large amount of people, their health and budgets are becoming issues; 31% say that everyday activities are becoming difficult, and 28% say that they are having difficulty making ends meet. Eleven percent feel isolated and lonely.

NEXT: Retirement activities

Retirees cite spending more time with family and friends (53%), pursuing hobbies (40%) and traveling (33%) as their three most common activities. Twenty-four percent are volunteering their time, and 11% are taking care of their grandchildren.

Asked about their biggest retirement fears, and 44% say it’s declining health that will require long-term care. The same percentage is worried that Social Security benefits will either be reduced or eliminated. Forty-one percent fear they will outlive their savings.

While 54% of retirees indicate they have a retirement strategy, only 10% have it in writing. For those with a retirement strategy, the most common elements of that strategy are Social Security and Medicare (88%), ongoing living expenses (71%), health care costs (60%), basic living expenses (60%), income needs (60%) and investment returns (56%). Only 31% consider pursuing retirement dreams, a mere 30% inflation, 26% estate planning, 25% tax planning, and 23% long-term care insurance.

“Today’s retirees are facing formidable challenges in ensuring that they have adequate income to last their lifetimes,” Collinson says. “As Baby Boomers retire, Social Security and other benefit programs will likely be under even greater strain. It’s imperative that policymakers, employers, industry, individuals and families work together to find solutions so that the retirees of today and tomorrow can have a comfortable retirement.”

The report is based on a survey of 2,012 people age 50 and older conducted by Harris Poll. The full report can be downloaded here.

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