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By Adam Zoll | 05-21-2013 04:00 PM

What's Propelling Target-Date Popularity?

401(k) auto-enrollment and auto-escalation recently helped to propel target-date funds--the default choice in many plans--to record inflows.

Adam Zoll: For Morningstar, I'm Adam Zoll.

Target-date funds are becoming an increasingly popular investment option for those saving for retirement.

Here to talk about trends in target-date funds is Jeremy Stempien, director of investments from Morningstar Investment Management.

Jeremy, thanks for being here.

Jeremy Stempien: Thanks for having me, Adam.

Zoll: Your team just put out its quarterly report on target-date funds, and among the interesting findings was that there were record inflows to target-date funds in the first quarter of 2013. What were the findings and why do you suppose there were these record inflows?

Stempien: We did see inflows at an all-time high for the quarter. I think there's probably a number of reasons we saw them, maybe the most obvious being that target-date funds continue to be the predominant winner in the QDIA [Qualified Default Investment Alternative] race among plan sponsors, meaning plan sponsors or companies are designating target-maturity funds as the default for their employees. So we continue to see increased usage among employees, and target-date fund assets have continued to trend upward.

In addition to that common theme, I think we typically tend to see a bump during the first quarter of the year, and that's due to probably a number of factors: one being the 402(g) limit, so the contribution limit for participants. Some participants hit that limit throughout the year, and they stop contributing. At the beginning of the following year, they start contributing again. So you see some of those people come back into those contribution or those asset numbers. Also a lot of companies may pay out a bonus, and part of that bonus may go into target-maturity funds during the first quarter. So I think it's not uncommon to see those sorts of things really affect the flow numbers.

Then there are other factors, like increased services by plans, like auto-escalation, so rates may be kicked up a little bit during the first quarter. Continuing just to default people in at higher rates in general continues to contribute to that flow number generally rising over time, but particularly in the first quarter we saw great flows.

Then top that off at the end of the day with consumer confidence being at a high for employees. The markets had a nice little run. That encourages people, they tend to want to contribute more, [and] get back into contributing in their 401(k) plan.

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