Target date funds (TDFs) have grown increasingly popular since their inception over two decades ago. In fact, 72% of retirement plans have TDFs as their default option and more than 40% of retirement plan account holders use a TDF. With so many employees invested in Target date funds, it’s important to understand how they tend to behave in markets under pressure and their likelihood to adhere to a long-term investment strategy. The good news for plan sponsors with TDFs under management is that those invested in them tend to stay put — even during volatile and declining markets.
A recent study by Fidelity examined the behavior of their TDF investors during two particularly volatile periods of the stock market: the 2007-2009 bear market and the 2015 downturn. They found that TDF investors tended to maintain consistent savings behavior and retain their market exposures during both of these declines. Interestingly, even investors close to their retirement date tended to stay the course. For example, during the 2007-2009 period, the highest percentage of daily exchanges out of Fidelity’s 2010 TDF never exceeded .5% of all active participants.
The analysis indicated that the number of participants who changed out of TDFs during these declines was relatively small, independent of their glide path. However, investors in funds with a “through” glide path (where the most conservative positions are achieved several years past the date of retirement) were even more likely to stay invested than those invested in TDFs with a “to” glide path (where the most conservative allocations are reached on the date of retirement). During the 2015 downturn, investors in a 2020 Target Date Fund with a “to” glide path were four to five times more likely to change out of a target date strategy then those in a “ through” glide path. The reasons for this discrepancy are unclear and should be investigated further.
The study also looked at whether there was a difference between participants who were auto-enrolled into TDFs versus those who selected one by choice. The results indicate that auto-enrolled target date fund participants were more likely to stay invested in down markets than those who enrolled of their own volition.
These findings are good news for organizations that offer Target Date Funds and the employees invested in them. Plan sponsors may wish to consider including a default auto-enrollment into TDFs as a part of an overall strategy to help encourage participants to stay the course with their investment plan, even during volatile markets.