It’s been a little more than a decade since qualified default investment alternatives (QDIAs) transformed how millions of Americans save for retirement. By offering employers safe harbor status on certain retirement investments, the Department of Labor accelerated the shift from defined benefit to defined contribution plans. And the appeal of age-based enrollment and automatic asset allocation adjustments made target-date funds popular options in investment menus. Today, target-date funds (TDFs) are by far the most common QDIA used in retirement plans. 1
For plan sponsors, the tremendous growth in assets, changing market conditions and balancing the needs of younger and older participants complicates selection and monitoring of these investments . Advisors can help by bringing plan demographics to the discussion and looking at the distribution of ages and account balances of a plan population.
Target-Date Funds Grow Up
Target-date fund assets have risen by 17 percent year-over-year since 2001, and at the end of 2017 stood at nearly $1 trillion. 2 What’s more, as new participants increasingly start out with TDFs, we can expect assets to continue to grow—perhaps at a faster clip than the past 10 years.
Mind the Generation Gap
Although TDFs are pulling in new generations of savers, participants 20 years or fewer from retirement hold the lion’s share of assets— more than 7 times the amount held 10 years ago. 3 We expect assets to continue to grow with more participants starting out with TDFs; potentially doubling by 2022 for participants 50 years and older.
Target-Date Funds and Participants Grow Up
Target-Date AUM for Participants 50+ Years Old
1. Includes 12/31/2007 data for all mutual fund target-date assets for the Target-Date Retirement, 2000-2010, 2015, 2020, and 2025 Morningstar categories.
2. Includes 12/31/2017 data for all mutual fund target-date assets for the Target-Date Retirement, 2000-2010, 2015, 2020, 2025, 2030, and 2035 Morningstar categories.
3. 2022 TDF assets under management are purely hypothetical and assume a 2x growth in assets over the next 5 years.
More Retirements at Risk
Participants reaching their peak wealth levels and nearing the time they will be withdrawing their money may have risk sensitivities that, in many ways, can be counter to those just starting out. The sheer number of participants close to retirement and relying on TDFs means a market correction could be devastating—even one less dramatic than the financial crisis of 2008-2009.
A Downturn Similar to 2007 May be Even More Devastating
Weighted Average Losses for Age-50+ Vintages
2017 loss calculation for illustrative purposes only and is based on a hypothetical 20 percent loss for the mutual fund assets show in figure one as of 12/31/2017.
2022 TDF assets under management are purely hypothetical and assume a 2x growth in assets over the next five years. Loss calculation is for illustrative purposes only and is based on a 20 percent loss for hypothetical TDF assets.
New Resources for High-Stakes Decision-Making
Retirement advisors have a clear opportunity to bring important demographic considerations to the default selection process. Engaging clients in a thoughtful dialogue about how to strengthen their plans may place more employees on a solid path to secure retirements. With so much at stake, we now offer plan fiduciaries innovative, customized analysis to help determine how suitable a TDF is across the generations of participants in their plan.
Retirement Advisors,learn about new resources available to help with TDF evaluation and selection.
1 Source: PSCA’s 59 th Annual Survey of Profit Sharing and 401(k) Plans, Reflecting 2015 Plan Experience.
2 Source: Morningstar Direct. Data as of 12/31/2017.
A target date is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.
Each target-date portfolio seeks the highest total return according to a preset asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio’s allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and money market instruments.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of Chat Cowherd and are no guarantee of the future performance of any American Century Investments fund.
This information is for educational purposes only and is not intended as a personalized recommendation or fiduciary advice. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.