The Markets September 14, 2021

TDF Usage Increases as Younger Participants Invest

Fifty-one percent of 401(k) plan assets owned by participants in their 20s were invested in TDFs, versus 23% for those in their 60s. 

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The Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) have found that participants are increasingly using target-date funds (TDFs) to save for retirement—especially younger participants.

A new report by the two organizations found more 401(k) plan participants are using the funds than in the past. EBRI and ICI examined year-end 2018 data from the EBRI/ICI 401(k) database—which follows millions of 401(k) plan participants as a means to examine how these participants manage their plan accounts—and found that 56% of participants in the database held target-date (or lifecycle) funds. That’s up almost 200% in 12 years. TDFs also held 27% of total 401(k) plan assets in the database.

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Younger 401(k) participants were more likely to hold TDFs than older participants. According to the report, at year-end 2018, 62% of plan participants in their 20s and 61% of those in their 30s owned TDFs, compared with 50% of participants in their 60s.

Additionally, 51% of 401(k) plan assets owned by participants in their 20s were invested in TDFs, versus 23% for those in their 60s. Almost half (41%) of participants in their 30s held plan assets in TDFs, with the number lowering significantly for participants in their 40s—to 28%.

Perhaps unsurprisingly, younger plan participants who held assets in target-date funds had higher allocations to equities than older groups. Among participants in their 20s, those holding TDFs invested 87% of their plan assets in equities.

Plan participants in their 20s also had a higher concentration of their accounts in target-date funds than older TDF investors. Eighty-eight percent of younger plan participants with TDFs held more than 90% of their accounts in these funds, with only two-thirds of TDF investors in their 50s and 60s holding such a high concentration.

The EBRI and ICI report studied how 401(k) participants are investing their TDFs, finding that most follow investing approaches that are appropriate for their age group. For example, among 401(k) plan participants with one TDF, 91% of those in their 20s held a TDF that had asset allocations in conjunction with their age. Overall, the vast majority (88%) of participants with TDFs held one age-appropriate TDF.

Additionally, participants tend to be using a TDF in accordance with their retirement date. For example, 83% of 401(k) plan participants holding a 2040 TDF were in line with reaching age 65 in 2040, and 96% of investors in the 2035 funds were also appropriately aged.

The firms said the heightened usage of TDFs can be attributed to the funds’ increased accessibility over time. For example, in 2006, 57% of plans offered TDFs to their participants. In 2018, that number rose to 79%. And now, 56% of participants use the funds, compared with just 19% in 2006.

But that growth has also led to scrutiny. In May, the chairwoman of the Senate Health, Education, Labor and Pensions (HELP) Committee and the chairman of the House Education and Labor Committee asked the Government Accountability Office (GAO) to conduct a review of TDFs.

They say that while TDFs are billed as offering participants retirement security by placing their assets in an age-appropriate glide path that grows more conservative as they approach retirement, the funds might actually be placing some participants at risk. Specifically, they say expenses and risk allocations vary considerably among funds.

An academic paper released in May also took aim at TDFs, saying they can take advantage of investors who aren’t paying attention to their accounts.

Past research has also shown that some investors aren’t using the vehicles as they are intended to be used. A combination of investor overconfidence and a desire for greater diversification can drive misuse.

Data & Research September 14, 2021

Mercer Encourages Employers to Better Support Their Workers

The firm says employee satisfaction tends to trend higher for employers that offer superior benefits.

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The more supportive an employer is, the more optimistic and loyal its employees will be, Mercer says in a new study.

As the Delta and other variants of the coronavirus prolong the pandemic, more employees say they’re looking for support from their employer and that getting it (or not) affects their well-being. Mercer’s latest “Health on Demand” study found that since the onset of COVID-19, employees who say they received good support from their employers are much less likely to view their personal experience with the pandemic as mainly negative, compared with those who received little to no support, at 25% vs. 49%.

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Additionally, 45% of those receiving good support say they are less likely to leave their job as a result.

The Mercer study underlined the physical, emotional and mental tolls the pandemic has taken. More than half of U.S. employees said they felt some level of stress in the past year. Nearly a quarter of employees say they experienced mental health issues such as depression or anxiety; a fifth are financially worse off; and nearly a fifth feel less physically healthy or fit. Low-wage earners were more likely to experience each of these negative impacts—and less likely to feel supported by their employers during the pandemic, according to the study.

While 59% of employees said they feel some level of stress, one-quarter reported being highly or extremely stressed. And while 48% of employees rate employer support for mental health as highly or extremely valuable, 40% say it is difficult to find and access quality mental health care. It’s even harder for some employees: Among low wage earners, that number rises to 47%.  Likewise, employees identifying as LGBTQ place the highest value on employer support for mental health—61% say it is highly or extremely valuable, but nearly as many (58%) say quality mental health care is difficult to find and access.

Mercer also said participants with plans that hold a variety of benefits tend to have better outlooks. Of employees who are offered 10 or more health and well-being benefits or resources by their employer, 52% say their benefits are a reason to stay with their company, compared with 32% of those that are offered one to five benefits.

The types of benefits matter as well, especially with a growing interest in digital access to health care. One-fifth of employees reported using telemedicine for the first time during the pandemic, and another 23% increased their usage of the benefit. Of those who tried telemedicine for the first time, 72% say they plan to keep using it.

Compared with the 2019 Health on Demand survey, a greater percentage of employees in the 2021 survey found digital solutions to be highly or extremely valuable. Mercer says this reinforces the idea that employers need to plan for a future in which most health care journeys include virtual visits and digital health care support.

As health inequity persists in the workforce, Mercer recommends employers target strategies to help low-income workers and those who generally cannot afford high medical costs. For example, participants with a household income at or below the U.S. median are significantly less likely to feel confident they can afford the health care that their family needs (60%) compared with those above the median (83%).

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