Target-date funds have become popular additions to 401(k) retirement plans because they offer convenience, portfolio choices based on a participant's retirement age and a commitment device for future age-based equity balancing. The funds have made it easier for employees, who do not have the financial literacy to make their own portfolio decisions, to have access to a professionally managed retirement account, according to a new report by the Pension Research Council.
The report evaluates how the introduction of target-date funds influences patterns of both adoption and portfolio construction within 401(k) plans.
Employers have added target-date funds to default arrangements, including automatic enrollment, reenrollment and fund mapping frameworks. In these arrangements, participant contributions are directly invested in a fund designated by the employer. Many participants are choosing TDFs on their own because they don't have to make decisions about their investments.
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