Research Suggests Younger 401(k) Holders Prefer Balanced Funds

The number of workers using balanced funds, including target-date funds, has increased significantly in the past 15 years, according to a new survey by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI).

In 1998, only 28.9% of newly hired 401(k) plan participants used balanced funds, which minimize risk by spreading funds between stocks and bonds. By 2013, that number had more than doubled, to 66.3%.

The study also found that those who use balanced funds used them for the bulk of their 401(k) investments. Specifically, more than three-quarters of balanced fund users had more than 90% of their 401(k)s in balanced funds.

“These data suggest that regulatory changes have helped make it easier for employers to design their plans to cater to a wide array of 401(k) plan investors, ranging from folks who want to do it themselves—constructing a portfolio from the investments offered—to those who are invested in target-date funds for professional asset allocation, diversification, and rebalancing over time,” said Sarah Holden, senior director of retirement and investor research at ICI. “This evolution in plan design has resulted in increased diversification across asset categories, on average, for 401(k) plan participants.”

The study found target-date funds have helped drive the increased role of balanced funds. EBRI and ICI maintain a database of information on 26.4 million 401(k) participants. Target-date funds represented 15% of the total assets in the database, and 41% of participants held target-date funds, EBRI said.

“Target-date funds provide a convenient investment choice for 401(k) participants to automatically diversify at least a portion of their retirement portfolios and maintain age-appropriate asset allocations, even during volatile financial markets,” said Jack VanDerhei, research director at EBRI. “The growing use of these funds in recent years, especially among new 401(k) plan participants, has been accompanied by a marked decrease of young participants with zero equity exposure.”