Participants with a 401(k) plan who invest in target-date funds (TDFs) tend to stick with these investments over time.
According to a report released Tuesday from the Employee Benefit Research Institute, more than 90 percent of 401(k) participants investing in TDFs in 2007 stuck with them through 2009. Those identified as "auto-enrollees" were more likely to have stayed with TDFs, at a rate of more than 95 percent.
Participants who are younger and those who have lower account balances are more likely to use TDFs, and to continue to use them.
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Those more likely to stop investing in TDFs were older, had longer tenure, or had higher account balances, although these participants overall stayed with TDFs at a high rate.
"Target-date funds are still very new in 401(k) plans, but these results suggest that once they are used, TDFs are very likely to continue to be used for a number of years afterward, certainly in the short term," said Craig Copeland, senior research director at EBRI and author of the report. "Consequently, the auto-enrollment of participants into TDFs appears likely to stick, which means that the asset allocation within the TDFs is likely to be the asset allocation many of these participants will have while they remain in their 401(k) plan."
Though the usage of TDFs has become widespread, experts warn participants to take caution. Recently, Roger Wohlner, CFP with Asset Strategy Consultants in Arlington Heights, Ill., told Research Magazine, "The biggest problem with target date funds is the fact that there is still a great deal of confusion and misunderstanding among both participants and plan sponsors."
At U.S.News & World Report's "Money" section online, Wohlner gives participants 5 considerations before investing in target-date funds:
- The fund's glide path may or may not be important.
- How does the allocation of the target-date fund fit with your other investments?
- The fund closest to your projected retirement date may not be right for you.
- Understand the underlying expenses.
- Target-date funds don't equate to low risk.
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