Since the U.S. Labor Department's decision to allow employers to use target-date funds as a qualified default investment alternative in 401(k) plans, use of the funds in retirement plans is rapidly increasing, the Employee Benefit Research Institute writes. At the end of 2008, nearly 7 percent of 401(k) assets were invested in these funds. They were most popular among workers in their 20s, with 15 percent of young workers opting for the "all-in-one" investment option, while only 6 percent of workers in their 60s chose the funds.
EBRI reports, however, that over half of the workers who opted for target-date funds in 2007, also selected other funds in their employer-sponsored retirement plans. Most of these mixed-fund participants are middle-income workers. EBRI warns that participants who lack financial literacy may end up with a "potentially inferior portfolio in terms of risk/return tradeoff from more assets allocated to some sectors than the designers of the target date funds had planned."
Participants who invest less than half of their assets in target-date funds are more likely to choose two or more. Furthermore, they are likely to mix aggressive funds with target-date funds; equity funds make up an average 48 percent of account balances excluding target-date funds, compared with GIC and stable value funds which account for only 29 percent of account balances.
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