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Financial Advisor: DC Plan Assets Funneling Into Target Date Funds

March 9, 2020

Ross Bremen was recently featured in a Financial Advisor article discussing the 2019 Defined Contribution Plan & Fee Survey results.

Target-date funds have substantially grown in popularity within employer-sponsored defined contribution retirement plans, according to a survey released Wednesday by NEPC, an independent investment consulting firm.

As of the end of 2019, 39% of assets in defined contribution plans were in target date funds while only 22% were in 2010. The number of plans offering target date fund investment options has remained steady at 96% of plans, said the “Defined Contribution Plan & Fee Survey” by Boston-based NEPC.

Ross Bremen, a partner and member of the defined contribution practice group at NEPC, said in an e-mail, “It is no surprise that all the money is flowing to target date funds. Most participants will set it and forget it after being automatically enrolled in target date funds. Auto features and participant inertia have largely contributed to the increase in target date fund assets, and inertia keeps participants from making changes, so once they are set up, they just let their assets invested in target date funds grow.”

Bremen added, “The vast majority of plan sponsors have chosen target date funds as their qualified default investment. Sixty-eight percent of the plans in our survey now offer automatic enrollment, up from 51% 10 years ago. Many plans have also adopted automatic increase as well, with 52% of plans now offering the feature.

“The use of these auto features ensures that participants are enrolled in the plan and invested in an age-appropriate target date fund,” he said.

The survey included 121 plan sponsors from corporate and health-care companies, with a total of $135 billion in assets, representing 1.5 million plan participants. According to Federal Reserve data, defined contribution plans had $6.2 trillion in assets in 2018.

Seventy-six percent of corporate plans and 54% of health-care plans include an automatic enrollment feature in their plan designs as a way to help increase overall plan participation, the survey said.

NEPC said that 48% of the plans that incorporate auto-escalation offer it with an “opt-out” feature—which means by doing nothing, participants are automatically given the feature, as opposed to the opt-in feature that asks them to proactively sign up. That’s “a significant change from 2010, when only 28% of plans offering auto-escalation offered it as an opt-out feature,” NEPC said. When employees are given the “opt-out” choice instead, it generally encourages more of them to be part of the employer-sponsored retirement plans.

“Americans simply haven’t saved enough for retirement, which is motivating many plan sponsors to reassess plan design, menu options and distribution features to create meaningful solutions,” Bremen added. “Concurrently, employers and sponsors are feeling the pressure to deliver competitive solutions that help recruit top talent, reduce costs and threats of litigation, while also helping deliver on sponsors’ fiduciary responsibilities.”

“Plan features like automatic enrollment and automatic increases in contributions are widely considered solutions to the retirement savings problem, as inertia has proven to be a very powerful behavioral trait,” NEPC said. Sixty-eight percent of plans offer auto-enrollment and 53% offer auto-escalation features. The total participation rate for all is 81%.

Topics: Press, Press Coverage

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