DCIIA: TDFs Have Taken Over

Allocations to target-date funds increased by roughly 2.5% per year over 11 years, to approximately 50% of total defined contribution plan assets in 2023 from about 24% in 2013, according to new research from the Defined Contribution Institutional Investment Association’s Retirement Research Center.

In the report, the RRC found that total TDF allocation appeared to have more than doubled, but acknowledged that a 40% allocation to the funds in 2023 is likely a better estimate based on other industry datasets. The analysis may have overweighted the class because it is relatively easier to identify based on each fund’s name, which identifies a target retirement year—a classic component of a TDF.

The conclusion was part of the RRC’s latest research on the evolution of core fund menus at retirement plans. The organization reported that the piece it published is the first work in a series. It provided “information about shifts in asset weights, plan menu sizes, and fund availability.”

The RRC stated that, in the future, it plans to explore other shifts, including changes in the utilization of index funds, investment expenses and fund quality.

“Regardless of the exact figure, though, the trend is clear; 401(k) assets are increasingly flowing into TDFs,” the report stated. “The effect of the rise of TDFs on the absolute dollars in traditional core menu funds depends on how the aggregate size of the defined contribution market evolves in the future.”

Cerulli estimated last year that total DC assets could increase to $19.3 trillion by 2030, up from $13.6 trillion in 2024—more than 50% of which might be comprised of TDFs.

The average TDF allocation increased for plans of all sizes from 2013 to 2023, but the allocations tended to increase more for smaller plans, according to the RRC’s analysis. TDFs within micro plans increased to 60.2% of total assets in 2023 from 27.2% in 2013, while the share within mega plans increased to 48.1% in 2023 from 27.5% in 2013.

Cerulli data for the 2024 plan year reflected a different plan size trend than that published by the RRC, as Cerulli estimated TDFs comprised 37.4% of micro plans and 36.9% of mega plans. However, data on the 2022 plan year from BrightScope and the Investment Company Institute reflected a trend closer to DCIIA’s: TDFs comprised 44.6% of micro plans and 37.9% of mega plans.

Additionally, while average plan menu sizes have grown slightly during the RRC’s analysis period, the increase can be almost entirely attributed to the rise in the number of TDFs available, according to the report. The number of TDFs available on a core menu increased to an average of 10.5 in 2023 from 7.4 in 2013, while the highest number by which any other allocation increased was 0.1 (in the fixed-income category and “other”). Part of the growth of TDF offerings can be attributed to a greater share of plans offering TDFs, while another part can be attributed to the addition of TDF vintages for younger participants, according to the report.

The researchers also found that outside of TDFs, allocations to U.S. large-cap equity funds have the largest relative weights in plan core investment menus, and the share allocated to those funds is growing. Strong performance of U.S. large-cap equities in recent years is cited as among the reasons for the growth.

In addition, the research showed that, unlike equities (especially U.S. equities), core menus generally lack diversification options within fixed-income investment offerings. This despite the potential for increased need for fixed-income investments as more DC plan participants decide to stay in their plan during retirement and as older investors tend to seek more conservative portfolios.