Millennials Show Big Increase in Adapting to TDFs
Fidelity Investments, which manages the defined contribution plans for almost 20 million participants representing about 25% of the market, released their Q2 2016 data showing some increase in both DC and IRA account balances over the past quarter but down from last year. Results are indicating that more investors are using professional managed investments like target date funds (TDFs) and managed accounts which has been shown to provide better results in volatile markets.
Average Balances (Fidelity Investments)
| Q2 2016 | Q1 2016 | Q2 2015 | |
| 401(k) | $88,900 | $87,300 | $91,100 |
| IRA | $89,700 | $89,300 | $96,300 |
401k accounts balances are down 2.5% compared to Q2 2015 but up over the previous quarter; IRA balances are up slightly over the last quarter but down 7% over last year.
Overall, the percentage of people using only TDFs or managed accounts topped 45% almost triple the national average. Investors using these professionally managed investments are less likely to react to market volatility with just 1% making changes in the past 12 months compared to 13% for do it yourself investors. There was a marked increase in the use of Fidelity’s online tools and education resources.
Millennials seem to be getting the message, especially those that have been saving for 10 years or more – account balances have increased 10% in the past 12 months to a high of $92,900. The issue with Millennials is that they change jobs frequently which can lead to leakage, hard to manage multiple accounts and deferrals that reset at a low rate every time they make a move.
According to 2015 research from Voya Investments, only 15% of TDF investors use them properly by putting all their money in that investment, down from 16% in 2013.
Given multiple choices on why they decided to supplement their TDF choice, the results were:
- 46% wanted to diversify
- 28% wanted to more aggressive
- 28% wanted to customize
- 26% wanted to be more conservative
For most investors, putting all their money into a TDF makes the most sense. Plan sponsors can help through choice architecture – rather than listing the TDF as one of the investment choices, they can ask whether the investors wants a professional manage their money or select from a menu of funds rather than simply listing all investment choices.
