Younger retirement plan participants flocking to TDFs

Recently hired participants—those with two or fewer years of tenure—are also using TDFs at a higher rate.

The new joint study from the Investment Company Institute and the Employee Benefit Research Institute also indicates that more 401(k) plan participants are investing in equities than was the case before the financial crisis in 2008. (Photo: Shutterstock)

Younger workers participating in 401(k) plans are allocating a large part of their assets to target-date funds as well as to other types of balanced funds.

That’s according to 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2016, a new joint study from the Investment Company Institute and the Employee Benefit Research Institute.

The study finds that at year-end 2016, 64 percent of 401(k) participants in their twenties held TDFs, compared with only 45 percent of 401(k) participants in their sixties.

Recently hired participants—those with two or fewer years of tenure—are also using TDFs at a higher rate—59 percent—than 401(k) plan participants overall who invest in those funds, at 52 percent.

The study also indicates that more 401(k) plan participants are investing in equities than was the case before the financial crisis in 2008.

In 2016, it shows, approximately 67 percent of 401(k) assets were invested in stocks via through equity funds, the equity portion of balanced funds, and company stock.

Another 27 percent of plan assets were in fixed-income securities such as stable value investments, bond funds, money funds and the fixed-income portion of balanced funds.

“Retirement savers continue to invest heavily in equities through their 401(k) plans,” Jack VanDerhei, EBRI research director, is quoted saying. VanDerhei adds, “Though this is in large part driven by younger plan participants, savers in their sixties also remain focused on growth and held 55 percent of their 401(k) plan assets in equity investments.”

In 2016, according to the report, just 7 percent of 401(k) plan participants in their twenties had no equities; in fact, 77 percent of these younger plan participants had more than 80 percent of their account balances invested in equities.

That wasn’t the case for older participants, with 11 percent of participants in their sixties having no equities and 19 percent having more than 80 percent of their account balances in equities.

Investment in company stock by participants, however, is continuing at “historically low levels.” Just 6 percent of 401(k) plan assets were invested in company stock at year-end 2016, which reflects a drop of more than two-thirds since 1999. At that time, company stock accounted for 19 percent of assets.