The Effect of Default Target Date Funds on Retirement Savings Allocations
Most retirement plans let participants allocate their contributions among a menu of investment options – and this decision can have a substantial effect on a retirement portfolio’s ultimate value.
Defined contribution retirement plans are the primary retirement savings vehicle for most American workers, and many of these plans now use target date funds as their default investments. Previously, money market funds were the most common default. Retirement plans today also tend to offer more investment options than were available in the past. This study examines how these changes have affected plan participants’ contribution allocations and equity exposure, based on a 2012 cross section of more than 600,000 TIAA participants.
To determine how investment defaults and the number of fund options affect participant investment behaviors, the researchers analyzed data from a 2012 cross section of more than 600,000 TIAA participants working at 98 institutions. As part of the analysis, they separated participants into those who joined before and after target date funds became the default investments.