A greater number of 401(k) plan participants are investing in target date funds, according to a report released by the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI). Target date funds, also known as “lifecycle funds,” are designed to offer a diversified portfolio that automatically rebalances to be more focused on income over time.
The report, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012,” found that, at year-end 2012, 41% of 401(k) participants held target date funds, an increase from 39% in 2011 and 19% in 2006. In addition, 15% of the assets in the EBRI/ICI 401(k) database were invested in target date funds at year-end 2012, up from 13% in 2011 and 5% in 2006. The 2012 EBRI/ICI database includes statistical information on 24 million 401(k) plan participants, in 64,619 plans, holding $1.536 trillion in assets, covering nearly half of the universe of 401(k) participants.
The report found that, at year-end 2012, 61% of 401(k) plan participants’ accounts were invested in equities—through equity funds, the equity portion of target date funds, the equity portion of non–target date balanced funds, and company stock.
Younger 401(k) plan participants had higher concentrations in equities compared with older participants. Participants in their sixties had less than half of their 401(k) assets invested in equities. “Fears that retirement savers would abandon equities in the wake of the financial crisis have not been borne out by the data,” said Sarah Holden, ICI senior director of retirement and investor research. “And, target date funds are playing an important role for 401(k) investors, particularly for younger participants, by maintaining age-appropriate concentrations in equities.”
Target date fund use varies across 401(k) participant age, the report found. Younger participants are more likely to hold target date funds and target date funds represent a much larger share of their 401(k) assets. At year-end 2012, 52% of 401(k) plan participants in their twenties had target date funds, and those funds made up 34% of their 401(k) assets. “More new or recent hires invested their 401(k) assets in balanced funds, including target date funds,” notes Jack VanDerhei, EBRI research director. “At year-end 2012, nearly 54% of the account balances of recently hired participants in their twenties was invested in balanced funds, compared with about 7% in 1998. A significant subset of that balanced fund category is invested in target date funds.”
The report notes that, at year-end 2012, 43% of the account balances of recently hired participants in their twenties were invested in target date funds, compared with 40% at year-end 2011.
401(k) Loan Activity
The ICI/EBRI report shows at year-end 2012 that 21% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) accounts, unchanged from the prior three years (2009−2011), although slightly elevated compared to the period prior to the financial crisis (2006−2008).
Average 401(k) Account Balance
The average 401(k) participant account balance at year-end 2012, was $63,929 and the median account balance was $17,630, with wide variation reflecting the many variables in retirement saving, including participant age, tenure, salary, contribution behavior, rollovers from other plans, asset allocation, withdrawals, loan activity, and employer contribution rates.
The report found that older participants and those with longer tenure tend to have higher 401(k) balances at their current employers. For example, at year-end 2012, the average account balance among 401(k) plan participants in their sixties with more than 30 years of tenure was $224,287.