Mutual fund companies reported about 50 percent of 401(k) plan participants administered by them are invested in one target date fund. These funds make up one-third of all assets in defined contribution and 401(k) funds run by the mutual fund companies. The popularity of such funds is not new. It began in 2006. The year is significant as it was the year the United States Department of Labor stated to employers that the latter can enjoy automatic enrollment of their employees into 401(k) plans. Employees then could witness their savings rate go up every year. This will continue until that particular employee leaves the job.
Target date funds made up almost 20.4 percent of total assets in 401(k) and other defined contribution plans in 2017. This is an uptick from 18.4 percent and 16.8 percent in 2016 and 2015 respectively. As per Fidelity investments, about 49.1 percent of the workers in its administered plans got invested in single target date fund in the first quarter. The number was 67.5 for Millennials. On an empirical level, 30.2 percent of the asset plan were in such funds. It follows that T. Rowe Price, Vanguard, and Fidelity Investments constitute among the biggest administrators of such 401(k) plans.
The funds typically park their money in a mix of bond funds and stock funds. A few also adds a number of other asset classes. These may range from commodities to real estate. Company employees are usually requested to select a fund with target date nearest to that particular person's 65th birthday. The said mix increasingly becomes conservative with the approach of the target date. Conservative investments mean fewer stocks and a larger number of bonds.
The US Department of Labor provided employers legal protection as well. These could be had if money was invested into any one option out of a total of three options. This was mandatory except if the employee selected something else. One option out of three was the target date funds. The latter has now become the largest default investment in the 401(k) plans.
There will be a periodic re-balance of such funds. To give an example, the fund will sell stocks in the year when it outperforms bonds. The proceeds are then invested in bonds so that the asset mix of that year gets maintained. A level of discipline is thus imposed. Individual investors lack that quality.