Are target-date funds the future of 401(k) investments?

If you were thinking of adding a target-date fund option to your 401(k) – or making these investments a more prominent part of your current plan – the findings in this study should help convince you it’s the right move. 

By 2017, some 55% of all 401(k) participants and 80% of new plan members are expected to be invested in TDFs.

That’s according to a recent study by Vanguard, a defined-contribution plan administrator that handles 3.4 million accounts and 2,000 DC plans.

A surge in growth

Some other noteworthy stats from the Vanguard report:

• 84% of 401(k) plans offered a TDF (a 70% increase from 2004)
• 27% of 401(k) participants were invested in a single TDF (three times more than just five years ago), and
• 46% of all 401(k) balances were invested in TDFs.

However, it’s important for employers to be very careful when it comes to selecting these funds.

There’s a wide variety of target-date funds available that offer various investment strategies, glide paths (the shift in asset allocation over time untile the fund hits its “target”) and fees. And subtle differences in TDFs can make a major difference in how it performs for employees.

Help selecting, monitoring TDFs

Because the employer (as fiduciary) is ultimately responsible for its plan’s performance and fees, it’s important to have a clear understanding of the finer points of TDFs.

To help, the DOL offers the tips on selecting and monitoring TDFs.

The guide includes info on a number of issues, such as:

• Establishing a comparison process on TDF performance, and
• Reviewing different TDF fee info.