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.
Summary
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.
Key Insights
- Participants who had joined plans with a money market default largely switched out of the default option, had substantial variation in the equity exposure for their contributions, and, in 2012, allocated contributions to a median of three funds.
- Those who had joined plans with target date defaults held a median of one fund, generally the default option, and had increased equity exposure relative to participants who joined plans with a money market default.
- Target date defaults raised the amount participants contributed to equity by 13 percentage points on average and reduced or eliminated most allocation differences attributable to demographic variables.
- With a money market default, the size of the investment menu had a slight effect on the number of funds in which participants invested; this effect vanished under target date defaults.
