Sunday, January 19, 2014

"Left" Overs

On more than a few occasions in my youth, I would misplace some object of importance. Generally it was just something I set aside for just a moment in pursuit of some more interesting endeavor—and sometimes it was something I set down and forgot about until much later.

Regardless, being unsuccessful in locating the object, I was frequently inclined to suspect that the culprit responsible for the disappearance was my mother, who—as mothers do, spent more than a little of her existence picking up objects that had been left unattended in unsuitable places. There were, however, times when she had played no role in the “disappearance,” and she’d admonish me to look more diligently—that “it didn’t just get up and walk away on its own…”

Now, while there were times when I was certain that the object in question had done just that, once I was able to retrace my steps, to recall where I had been and when—and, inevitably, there it was.
That said, I wasn’t always happy to find things where I left them; comic books don’t hold up well in the rain, for instance, and fragile objects left in the reach of younger siblings (or pets) can have a frustratingly short shelf life.

Retirement plan sponsors, and those who support their efforts, have worked long and hard to engage participants with the management and oversight of their retirement plan balances, with mixed results. However, even the most engaged participants seem to struggle to find the time, inclination, or discipline to revisit those initial investment choices, much less to do so at the appropriate times. In fact, left to their own devices, it’s likely that many—perhaps most—retirement plan participants looking to see how their balances are invested would find them right where they “left” them at that initial enrollment meeting (though with proportions shifted by the markets in the interim).

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target date of his or her retirement.

Though their mark was being made prior to the sanction of the design as a qualified default investment alternative (QDIA) in the Pension Protection Act of 2006, target-date fund availability and usage have soared along with the ensuing expanded adoption of automatic enrollment. Indeed, nearly three-quarters (72 percent) of 401(k) plans in the EBRI/ICI 401(k) database included target-date funds in their investment lineup at year-end 2012, and 41 percent of the roughly 24 million 401(k) participants in that database held target-date funds. Among participants who were offered target-date funds as a plan option, 60 percent held them at year-end 2012, and target-date fund assets represented 22 percent of the assets of plans offering such funds in their investment lineups.

Reflecting the growing popularity of automatic enrollment, at year-end 2012, nearly 54 percent of the account balances of recently hired participants in their 20s were in balanced funds (a significant subset of which is in target-date funds), compared with 7 percent in 1998. Moreover, at year-end 2012, 43 percent of the account balances of recently hired participants in their 20s were invested in target-date funds, compared with 40 percent at year-end 2011.

The impact of these shifts, chronicled in the extensive EBRI/ICI 401(k) database, is already manifested in the increasingly diversified portfolios of newer hires and younger participants. Beyond that initial allocation decision, the TDF design incorporates an ongoing rebalancing over time, one that shifts the underlying portfolios such that they are less focused on growth and more focused on income over time—a rebalancing that occurs automatically, and without requiring the input or involvement of the participant-investor.

That is likely to have a significant impact over time, because with retirement investments, as with life, we often plan to come back and revisit our choices more often than time (or life) allows.

Nevin E. Adams, JD

“401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012” is available online here.
In 2011, an EBRI Issue Brief provided an informative examination of the use of target-date funds (TDFs) by a consistent group of 401(k) participants in plans that offered them in 2007 through 2009. See “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007–2009,” online here.

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