“Menu-tiering” Aiding Rise in Target-Date Funds: Vanguard

It’s no secret that target-date funds have grown in popularity. A new Vanguard study, How America Saves, shows that 27% of plan participants were invested in single target-date funds at year-end 2012 and 51% of all participants use target-date funds. Also, 84% of sponsors offer target date funds, up 45% compared with 2007.

As plan sponsors have evolved their offerings for participants not wanting to construct their own portfolio, they have created a “menu-tiering” approach, says Jean Young, Vanguard senior research analyst. “What sponsors are doing when they look at their offer is…they’re positioning them as the first tier.” She adds that in the core line-up, sponsors are ensuring an indexed option.

“In the third tier you might see more of the extended offerings, more of the specialty funds, perhaps the brokerage window,” she explains. “Because it is offered in this tiered approach, and many sponsors might feel the other offerings are too complicated and don’t want to pick [the investments] on their own, stop at tier one and pick the target-date funds.”

Part of this growth, and the growth of professional managed allocations is influencing extreme portfolio allocations. One statistic in the report shows that in 2003, 14% of participants had no investments in equities and 24% had all their investments in equities. At year-end 2012, seven percent had no equities and nine percent had all equities.

“With the growing emergence of the field of behavioral command and the growing understanding of the types of choices people were making, have caused us to pause and re-think it. We know these participants have more discipline and better diversified portfolios [today] and their outcomes are what we’d expect. We know these products are improving portfolio construction for the participants that use it,” says Young.

Plan participants are in relatively good shape, notes Young. The average and median deferral rates between 2005 and 2012 have been between nine and 11%. “There are plenty of individuals with strong savings rates in these plans and I think it’s a pretty good news story that the average, over the last several years, with one of the worst financial markets we hopefully ever encounter, has remained resilient.”

Young says the experience of compound savings and the fact that it comes out of one’s paycheck before it can be spent is very powerful. “These are huge commitment devices.”

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community. joel@kranccomm.com.

 

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