Do you like chocolate? How about bacon? Most people will say they enjoy these treats from time to time. But, have you ever eaten chocolate-covered bacon? If you’re thinking “yuck,” you’re likely with the majority. And yet, if you Google “chocolate-covered bacon” you may be surprised to learn that there are many fans of the unlikely concoction.

The message here is that while unusual combinations are not right for most people, they may be satisfying for others. Now, let’s apply this logic to the investment selections of DC plan participants. Should plan participants mix TDFs with other investment options? The answer is that for a small percentage of investors, it may be a perfect combo.

Pure vs. mixed

Of all participants in DC plans, which are recordkept at Vanguard and offer TDFs, 70% owned TDFs as of year-end 2015. Of this group, 60% were pure TDF investors and 40% were mixed investors. Mixed investors can be either plan sponsor- or participant-directed. Of the 40% who were mixed investors, nearly half of the cases were sponsor-directed; slightly more than half were participant-directed.

40% of DC participants who invest in a TDF, mix their TDF with another investment

Pure Vs Mixed TDFs

Source:  Vanguard, 2016.

Now, there are many in the financial industry who strongly believe that mixed investing is a bad idea; that mixing a TDF with another investment option is a misuse of TDFs, which generally have been promoted as an “all-in-one” portfolio approach. At Vanguard, we don’t agree with a blanket rejection of pairing a TDF with another investment. Recent Vanguard research suggests that the small group of strategic mixed investors (about 22% of all TDF investors) are often demonstrating reasonable investment practices based on their personal preferences and needs. In other words, while it’s unconventional, Vanguard doesn’t think that chocolate-covered bacon (in moderation) is a uniformly bad choice for everyone.

Participant investing patterns

In A Different Kind of Target-Date Investor, a paper I coauthored with Stephen Utkus, we looked at recordkeeping data from 3.8 million Vanguard plan participants invested in about 1,650 DC plans offering TDFs. We analyzed investment-selection decisions to see what we could infer about people’s investing patterns.

We learned that some mixed investors are strategically coupling their TDF with another option that is either slightly more aggressive or slightly more conservative than their TDF. In cases like this, we believe that as long as the expense ratios are in line, and the investors are willing and able to manage the rebalancing of their portfolios going forward, their decision to mix may not be wrong for them.

Plan sponsor actions may spark mixed investing

As a plan sponsor, you should be aware that some participants become mixed investors by default because of legitimate plan actions. A plan sponsor may add a target-date or other investments to a participant’s portfolio through employer contributions, recordkeeping administration adjustments, or investment menu changes. For example, if participants hold a TDF but their employer contributions are in company stock, the result will be mixed investing. The same result occurs if an existing fund option is dropped and the default replacement is a TDF.

Note that in most instances you are well within your fiduciary rights if participants become mixed investors by doing nothing. All participants can choose to undo a default allocation or exchange an employer contribution. Participant education can help investors better understand their options.

When too much is too much

Through our research we also discovered a tiny worrisome segment of participants. About 4% of mixed TDF investors overindulge on investment options, creating portfolios at risk of excessive diversification. These investors, some holding as many as eight funds including a TDF, run the risk of having overlapping and unnecessary holdings and “closet indexing,” i.e. indexlike exposure with active management fees.

To reduce the risk of excessive diversification, plan sponsors may consider offering participants a managed account advisory service or use automatic enrollment and/or reenrollment to lead more participants to a single target-date allocation. Too much of almost anything can become problematic.

Never say never

To conclude, while it’s not a best practice, we have found that most plan participants who choose to mix a TDF with another investment have sound reasons for their actions. TDF glide paths are geared to be a one-size-fits-all solution for the average participant. But not all participants are average. The single-fund solution can work for the vast majority of DC plan participants. But for those who are more informed and engaged, mixing a TDF with other investments isn’t necessarily a mistake. It’s a matter of individual taste.

I’d like to thank Kathy Meehan for her much-appreciated contributions to this piece.


  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in Target Retirement 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 the Target Retirement Fund is not guaranteed at any time, including on or after the target date.