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Target date funds (TDFs) are the most common qualified default investment alternative (QDIA) in 401(k) plans. At year-end 2022, more than two-thirds of participants in the Employee Benefit Research Institute/Investment Company Institute (EBRI/ICI) 401(k) database held TDFs in their account. A recent ICI study suggests most participants appear to buying and holding these funds to or through retirement – consistent with their design – while also shedding light on the investment decisions of those who don’t.
ICI researchers tracked approximately 700,000 participants who were invested exclusively in TDFs at year-end 2016 and maintained accounts through year-end 2022. The study examined how their investment decisions changed over that six-year period, offering insights into how and when participants move away from TDFs. Among the findings:
- Of 401(k) participants who were invested solely in TDFs in 2016, 85% remained fully invested in them in 2022.
- Among participants who reduced or eliminated their TDF holdings, those in their 60s were more likely to exit TDFs completely, while younger participants were more likely to reduce — but not exit — their TDF allocations.
- When exiting TDFs, 47% of participants in their 60s increased equity exposure by at least 20 percentage points and 32% decreased it by at least 20 percentage points.
The researchers noted that limiting the analysis to participants who maintained 401(k) accounts throughout the six-year study period reduced the effects of participants and plans entering and leaving the database. They also noted that the data does not capture reallocations made within a calendar year or transfers from one TDF to another when participants remain fully invested in TDFs.
TDFs are investment vehicles designed to provide investors with a retirement savings over time by automatically adjusting the TDF asset allocation mix along the risk spectrum as the investor approaches retirement age. The TDF includes a year (vintage) in its name, which is generally when the investor plans to start redeeming from the TDF, unless it is a retirement vintage designed for those who are retired. Generally, the TDF initially has more exposure to equities early on and more exposure to fixed income the TDF approaches its target date. A TDF is not guaranteed at any time, including at and after the target date; it does not guarantee sufficient income in retirement.
Sources:
https://www.ici.org/system/files/2026-05/per32-06.pdf
https://www.ebri.org/docs/default-source/pbriefs/ebri_ib_658_k-tdf-28may26.pdf?sfvrsn=5704022f_1
https://www.ebri.org/content/a-closer-look-at-401(k)-plan-target-date-fund-investors–account-balance-asset-allocations-over-time
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