Participant Adoption

In DC plans offering target-date funds, about three in ten participants were invested in the strategy as of year-end 2007 (Figure 3). Participants' adoption of target-date funds lagged risk-based funds somewhat—27% versus 32%—probably because target-date funds were introduced several years later than risk-based funds in Vanguard-administered plans.

Who adopts target-date funds? And how are adopters different from other participants who are offered the funds, but don't use them? Compared with non-target-date investors, target-date investors are somewhat younger and have substantially shorter job tenure (Figure 4, two left columns). Indeed, more than one-third are recent hires with two years or less of job tenure. They also have somewhat lower incomes and are somewhat more likely to be female, although these differences are modest. The most substantial difference between the two groups—not surprising given their lower income and shorter job tenure—s their DC account balance. Target-date investors had a mean balance of around $11,500 as of year-end 2007, compared with $42,000 for non-target-date users. They also had somewhat lower levels of nonretirement financial wealth.[6]

Another factor influencing participant adoption of target-date funds is whether these funds are designated as the plan's default. In our data set, we do not know whether a specific individual was defaulted into a target-date fund. But we do know whether the target-date fund was selected as the plan's default. Nearly eight in ten target-date investors are in plans that designate target-date funds as the QDIA.

Mixed Vs. Pure Investors

Target-date funds were initially conceived as a single portfolio solution. Yet in DC plans, where participants are able to make investment choices on their own, two patterns of target-date usage have emerged. Participants may use target-date funds as "pure" investors, holding only a single target-date fund and no other investments. Alternatively, they may be "mixed" investors, combining one or more target-date funds with other types of funds offered by the plan.

Pure and mixed investors are distinctly different (Figure 4, prior page, two right columns). Pure investors are somewhat younger and significantly shorter-tenured compared with non-target-date participants, and 46% are recent hires. They have lower incomes and are somewhat more likely to be female. They have dramatically lower balances-a mean balance of just more than $4,700—and are less engaged investors; fewer than half have registered for Internet access to their plan accounts. We interpret Internet registration as a measure of a participant's engagement as well as of their technological sophistication because participants must actively choose to sign up for Internet access.

Also, 80% of the pure target-date investors were in plans that used target-date funds as the designated default, suggesting a link between the default fund designation and pure target-date investing. The target-date fund also may be influencing the equity exposure of pure investors, who have 81% allocated to equities, compared with only 69% among non­target-date investors.

By contrast, mixed investors are somewhat older, better-paid, longer-tenured, and more likely to be male than pure investors. In fact, they appear more like non-target-date participants, although they have shorter job tenure and lower balances compared with non-target-date investors. They also differ from non­target-date investors in their equity allocation, which is ten percentage points higher than that of non­target-date participants—again the possible influence of the target-date holding.

How many mixed and pure investors are there? It depends on the measure. When 2007 year-end account balances are used as a measure, 34% of target-date investors are pure users and 66% are mixed users (Figure 5). When total contributions during the 2007 calendar year are used as the measure, 45% of target-date participants are pure users and 55% are mixed users.[7] Finally, when we examine participants' first contribution (their first elective deferral) in 2008, which is perhaps the best indication of their forward-looking investment intentions, the percentage of pure investors climbs to 53% and the percentage of mixed investors falls to 47%.

Because of the confounding effects of employer contributions (which may be directed to other investments, such as company stock) and prior employee holdings, we use employee-elective deferrals as our preferred measure for analyzing investor behavior in the remainder of this report.

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