In 2011, 33% of all Vanguard participants were invested in a professionally managed allocation program: 24% in a single target-date fund (TDF); 6% in a single traditional balanced fund; and 3% in a managed account advisory program. The total number is up from 9% at the end of 2005.
These options dramatically improve portfolio diversification for many participants, helping to reduce the risks associated with either having too much in equities (which could expose a participant to considerable market volatility) or too little (reducing the long-term return potential of a retirement portfolio). For instance, in 2011, a total 18% of participants took an extreme position in equities, holding either 100% in equities (10% of participants) or no equities (8%). In contrast, a total of 34% of participants held extreme equity positions in 2005.
Fueling much of the growth of these programs is the soaring adoption of target-date funds (TDFs). Eighty-two percent of plan sponsors offered target-date funds in 2011, up from 28% in 2005. Forty-seven percent of all participants use TDFs. While the growth of these funds is frequently attributed to their designation as the investment default in automatic enrollment plans, many participants are voluntarily choosing TDFs. In plans with voluntary enrollment, 48% of participants are invested in TDFs. Vanguard believes the surge of TDF usage will continue to influence the adoption of professionally managed allocations. “Largely because of the growing use of target-date options, we anticipate that 55% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed allocation by 2016,” said Jean Young, chief author of “How America Saves.”