A recent analysis by Alight Solutions found retirement plan participants invested in target-date funds (TDFs) are contributing less than those who don’t utilize TDFs.

However, a Vanguard report highlighted the extreme growth among these investment funds—93% of plans associated with the advisory firm have adopted TDFs as of 2018. That same year, TDFs accounted for more than one-third of total Vanguard defined contribution (DC) plan assets and over half of total DC plan contributions.

TDFs’ domination of the total fund landscape lends itself two questions: 1. As the fund increases in popularity, why are more participants contributing less to their retirement, and 2. Are there other funds that, while not as popular, incentivize participants to save more?

Sarah Holden, senior director of retirement and investor research at the Investment Company Institute (ICI), believes one cause linking to a savings shortage is automatic enrollment. As participants are automatically enrolled into their workplace’s 401(k) upon hiring, some will stick to the default rate, in the classic “set-it-and-forget-it” type of approach.

“Nine out of 10 participants are in a plan where their employers put money in their account for them, but that depends on how much money [participants are] looking to put in,” Holden explains. “It’s the impact of auto-enrollment design and employer match.”

According to the Alight report, other causes for reduced savings include the belief that TDF returns will boost savings accumulation related to age among investors. Younger investors are likelier to save less (even if they’re likelier to meet their retirement goals), due to the notion that they will save more as they age. Others who remain full TDF investors may automatically think their returns will heighten their savings.

“People have been told not to pull all their eggs in one basket, and that’s what a TDF looks like to them,” said Rob Austin, head of Research at Alight Solutions, at the time the report was released. “They don’t understand that there’s diversification in underlying funds.”

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