Investment Behavior of Target-Date Fund Users Having Other Funds in 401(k) Plan Accounts
University of Idaho - College of Business & Economics
December 1, 2009
EBRI Notes, Vol. 30, No. 12, December 2009
Target-date funds (TDFs) are an important and growing investment option in 401(k) retirement plans, and are giving rise to a new class of 401(k) investor: “mixed” target-date fund users who hold the funds in combination with other non-TDF funds in the plan menu. Although “pure” TDF users holding only TDFs in their accounts have grown due to auto-enrollment and TDFs’ status as a qualified default investment in 401(k) plans, mixed TDF users account for a significant portion of all TDF users. About 7 percent of all 401(k) assets were invested in TDFs as of year-end 2008, and mixed TDF users accounted for about 55 percent of the participants holding target-date funds in their accounts as of year-end 2007. Pure TDF users are more likely to be younger or lower-salary participants who are automatically enrolled into target-date funds, while mixed TDF users are likely to be middle-income and middle-wealth participants.
This paper examines how mixed TDF users utilize other funds (except TDFs) in their 401(k) plan menu. In order to minimize the effects of plan menu design on participants’ investment behavior, this analysis constructs a sample from the EBRI/ICI 401(k) database of plans offering six fund categories including TDFs: equity funds, bond funds, non-TDF balanced funds, money market funds, and guaranteed investment contracts (GICs)/stable-value funds. However, the sample does not include plans offering company stock. Overall, this analysis finds that some mixed TDF investors apparently fail to understand that a TDF is designed as an “all-in-one” portfolio solution. For instance, mixed TDF users are more likely to hold multiple TDFs than are pure users who invest only in TDFs, and low-level mixed TDF users (who invest less than half of their account balances in the funds) are more likely to use two or more TDFs than are high-level mixed users (who invest more than half their balance in the funds). Last, mixed users holding relatively aggressive TDFs for their age group (such as someone in their 50s investing in 2050 funds) are more likely to actively invest in equity funds than those following the age-specific investment rule.
The PDF for the above title, published in the December 2009 issue of EBRI Notes, also contains the full text of another December 2009 EBRI Notes article abstracted on SSRN: “What Do We Know About Enrollment in Consumer-Driven Health Plans.”
Number of Pages in PDF File: 16
Keywords: 401(k) plans, Asset allocation, Employment-based benefits, Self-directed investments, Target-date funds
JEL Classification: D31, D91, G11, J26Accepted Paper Series
Date posted: December 6, 2009
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