Target date funds gain traction in 401(k)s

More than 7% of 401(k) assets were invested in target date funds at the end of 2007 and 25% of 401(k) participants held the funds, according to an analysis released today.
The data, released from Washington-based Employee Benefit Research Institute and Washington-based Investment Company Institute, showed that target date funds, which are also called lifecycle funds, are becoming commonplace in people’s retirement accounts.
Typically, investors chose a fund with a target date close to the year they expect to retire.
The mix of assets in the funds becomes more conservative as the investor nears retirement.
“The Pension Protection Act of 2006 and subsequent regulation included language that allowed employers to automatically enroll workers in their 401(k) plans and place them in an age-appropriate lifecycle fund if the employee did not make an investment choice. This provision is likely to increase the use of lifecycle funds in years to come,” Jack VanDerhei, EBRI research director and co-author of the study, said in a statement.
The report, entitled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007,” also found that more recent hires invested their 401(k) assets in target date funds.
At yearend 2007, 28% of the account balances of recently hired participants in their 20s were invested in balanced funds, compared with 24% in 2006, 19% in 2005 and about 7% in 1998.