Abstract
AbstractTarget-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Inclusion of these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target-date funds may enhance retirement wealth by as much as 50% over a 30-year horizon.
Highlights
Target-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans
target-date funds (TDFs) assets in 401(k) plans have grown dramatically over time: from $5 billion in 2000 to $734 billion in 2018 (ICI, 2019). This growth was spurred in part by a Department of Labor regulation issued under the 2006 Pension Protection Act designating TDFs as an eligible default investment option for automatic enrollment plans
In terms of the active choice effect, 3.9% of existing employees in voluntary choice plans switched all of their contributions to a single TDF when the funds were first introduced, while this figure rose to 14.5% for new enrollees
Summary
Target-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors Inclusion of these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. Participants in voluntary choice plans must make active investment decisions among target date and other fund offerings; participants in automatic enrollment plans are initially defaulted into a single TDF based on the employee’s current age and assumed retirement date (usually age 65), with the option to move subsequently to other investments. TDF assets in 401(k) plans have grown dramatically over time: from $5 billion in 2000 to $734 billion in 2018 (ICI, 2019) This growth was spurred in part by a Department of Labor regulation issued under the 2006 Pension Protection Act designating TDFs as an eligible default investment option for automatic enrollment plans.. As of 2020, indexed strategies were the dominant target data strategy in the marketplace, representing just over half of all target data industry assets. As a result, our dataset represents a real-world benchmark for the provision of low-cost, highly diversified professional portfolio advice to an important group of nonprofessional investors
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