Target-Date Funds Gain Popularity in 403(b) Plans

A news release about the Profit Sharing/401k Council of America (PSCA) study, sponsored by the Principal Financial Group, said another 21.8% of responding sponsors reported they do not currently offer the funds, but are considering it, 24.2% are unsure of what the funds are, and 21.2% said the funds are either unavailable from their provider or not recommended by the provider.

The poll also found that 36.8% of the plans that have automatic enrollment have a target-date fund as their plan’s default investment option – more than double the number of plans that indicated they used a target-date fund as the default in a 2008 PSCA survey. Use of automatic enrollment in respondents’ 403(b) plans increased to 27.3% from 16.5% in the 2008 poll.

“Thousands of not-for-profit organizations in the U.S. rely on employee benefits such as 403(b) plans to compete for the best employees,” says David Wray, president of PSCA, in the news release. “This survey shows that 403(b) plans are evolving to more closely resemble 401(k) plans.”

According to the survey, sponsors indicated widespread satisfaction with target-date funds. More than 58% of respondents reported being either satisfied or very satisfied with their target-date funds.

The survey also found the majority (90.5%) of 403(b) organizations use a packaged target-date product rather than customizing their own. Larger organizations are more likely to customize their target-date funds than smaller organizations.

Just over 12% of organizations are considering switching from a packaged product to customizing their own within the next three years.

Just under half (48.8%) of 403(b) sponsors said they will not make any changes to their target-date funds over the next three years, while 23.2% will consider changing the underlying managers or providers, and 22% percent will consider adding new asset classes within the next three years.

Items deemed most important by respondents in developing a successful target-date fund include:

• Diverse asset allocation,
• Quality of underlying investment managers,
• Liability risk minimization, and
• Cost control.

The survey was conducted in May 2009 and included 144 403(b) plans. More information is available here.

align="center"> Default Investment Option for Automatic Deferrals

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align="center"> Importance of Characteristics in Developing Successful Target-Date Funds

align="center"> On a scale of 1-5; 1 being extremely important, 5 being not important at all.

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