Question: How often do participants quit target-date fund strategies? And, how often do they abandon managed account options?

Answer: Not that often. Both target-date fund strategies and managed account options are pretty sticky.

Vanguard data shows a much lower quit rate—defined as no longer holding just a single target-date fund—compared with what others have reported. Using a broad data set that encompasses 4 million participants in 2,000 plans, I took a look at target-date fund retention rates for the five-year period ended December 31, 2015.

The retention rate was 87%. About 3% appear to quit because company stock was added to their portfolios. Did the plan sponsor make a matching contribution in employer stock? Some participants (2%) chose to adopt custom advice during this time frame.

Bottom line–only 8% of target-date fund users quit the product and constructed their own portfolios. Target-date funds are pretty sticky!

Target-date fund users January 1, 2011 to December 31, 2015

Source: Vanguard.

Vanguard data also shows that few users of managed accounts abandoned the product during the same period. Only 1% of participants switched from the managed account option to a target-date fund. And again, only 9% of participants quit the managed account option to construct their own portfolios.

Managed account users January 1, 2011 to December 31, 2015

Source: Vanguard.

Keep in mind that about half of target-date fund users were defaulted to the option—the other half of target-date fund users actively chose the target-date fund. Nearly all managed account users actively chose to take advantage of the service—and they pay an additional fee for this option. However, once a participant is using these options—whether by choice or default—the option is quite sticky.

I think this is a really good thing. We know these options are improving retirement saving outcomes for these investors.

Thank you to Jeffrey W. Clark for providing the data for this blog.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns.
  • Investments in target-date funds 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 target-date funds is not guaranteed at any time, including on or after the target date.