How Would Target-Date Funds Likely Impact Future 401(K) Accumulations?

Abstract

As part of EBRI’s 2008 analysis of the likely impact of the Pension Protection Act’s safe harbor automatic enrollment and automatic escalation provisions, we developed a stochastic simulation model to project future 401(k) balances as a function of various plan design variables as well as assumptions with respect to various employee behavioral responses. In this paper I report on the results I obtained using the EBRI simulation model to determine how target-date funds (TDFs) would likely impact 401(k) participants assumed to be automatically enrolled. I realize that TDF use in 401(k) plans is not limited to those automatically enrolled; however, based on our simulation results, it appears that this 401(k) auto-enrollment will represent the majority of TDF use in the future and hence I will concentrate my analysis on those results. Results are reported both at the time of retirement as well as at the time of job change for those who are assumed to cash out. Several scenarios are presented in terms of alternative rates of return as well as several different types of target date funds.

Keywords: 401(k) plans, asset allocation, employment-based benefits, pension plan assets, self-directed investments