The mutual fund behemoth says 64% of new 401(k) enrollees choose a single target-date fund for their investments.

The use of target-date funds in retirement plans at Vanguard is skyrocketing: 64% of new enrollees select a single target-date fund for their investments.
   
Nearly one in four participants in Vanguard's 401(k) programs are invested only in target-date funds (24%), which is a six-fold increase in the past five years. In 2006 only 4% held a single target date fund. Vanguard began offering target-date funds as part of the retirement packages in 2004.

As the use of target-date funds has grown, the percentage of 401(k) participants at Vanguard with only equities positions has diminished. In 2011, 10% of Vanguard participants held only equities and 8% had no equities, compared with 2004, when 22% of 401(k) participants held only equities and 13% had no equities. 

"We view this trend as extremely positive because TDFs are providing an increasing number of participants who are neither engaged nor sophisticated investors with balanced, well-diversified portfolios, as well as reducing the risks associated with extreme equity allocations," says Jean Young, an analyst in Vanguard's Center for Retirement Research. She is the author of Target Date Fund Adoption in 2011, the study of target-date fund usage.

The number of Vanguard retirement plans offering target-date funds has nearly doubled in five years, to 82% in 2011. Automatic enrollment of participants into retirement plans and plan sponsors' decisions to choose target-date funds as the default investment option have led to the increase, says the report.

One third of Vanguard 401(k) participants are invested in a single target-date fund, a single traditional balanced fund or a managed account advisory service. Vanguard expects the use of such professionally managed options to continue increasing. "In five years, Vanguard estimates that 55% of all participants and 80% of new participants will be invested in a professionally managed option," says Young.

- Karen DeMasters