The study in the December EBRI Notes points out that target-date
funds were designed to be “all-in-one” portfolios that diversify
asset allocations and rebalance over time based on a defined target-date
horizon, benefitting participants who lack financial literacy or desire to manage
their investments. “However, holding TDFs with other funds could lead to
an unexpected result of ending up with a potentially inferior portfolio in
terms of risk/return tradeoff from more assets allocated to some sectors than
the designers of the target date funds had planned,” the study says.
The study found that “mixed” target-date fund
users, or target-date fund users who hold the funds in combination with other
funds in their 401(k) plan menu, accounted for about 55% of all participants
holding target-date funds in their accounts as of the end of year 2007. “Mixed”
target-date fund investors are likely to be middle-income and middle-wealth
participants, whereas participants who only invested in target-date funds are
likely to be younger or lower-salaried participants who were automatically
enrolled into the target-date funds.
In addition, “mixed” target-date fund users are
more likely to hold multiple target-date funds than are users who invest only
in target-date funds, and low-level “mixed” target-date fund users
(who invest less than half of their account balances in the funds) are more
likely to use two or more target-date funds than are high-level “mixed”
users (who invest more than half their balance in the funds), according to the
EBRI also said “mixed” users holding relatively
aggressive target-date funds for their age group (such as someone in their 50s
investing in a 2050 fund) are more likely to actively invest in equity funds
than those following age-specific investment rules.
The study uses a sample from the 2008 EBRI/ICI 401(k)
database looking at plans having at least 10 participants and offering any
target-date funds in 2008. The sample includes participants ages 20-69 with account
balances between $10,000 and $250,000 as of year-end 2008.
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