Target-date fund adoption in 2020

April 14, 2021

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Target-date funds (TDFs) continue to reshape investment patterns in defined contribution (DC) plans in fundamental ways, according to a new Vanguard Research Note.

Three factors are driving the growth of TDF use by plan sponsors and participants: their simplified approach to investment decision-making and portfolio construction, the growing use of automatic enrollment, and their designation as a QDIA under the Pension Protection Act.

By design, the funds lead to a disciplined approach to portfolio risk-taking, and they help remedy the problem of extreme allocations found among many DC plan participants. For these reasons, their adoption is likely to continue to rise in the coming years.

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  • Investments in target-date funds (TDFs) are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a TDF is not guaranteed at any time, including on or after the target date.