Use of target-date funds is up significantly thanks to their status as qualified default investment alternatives under the Pension Protection Act of 2006 and the growth of automatic enrollment in company-sponsored plans, according to a new Vanguard study.

Since their inception in 2004, target-date funds now account for just under $60 billion of Vanguard’s total $1.2 trillion in assets under management.  

Net cash flows have grown steadily year over year, from $2.3 billion in 2004 to a peak of $14 billion in 2007, dipping to $13 billion in 2008 and $12.9 billion in 2009. Inflows for the first quarter of 2010 are already at $5 billion, indicating that target-date funds’ upward trajectory is back on track.

People aren’t just buying them because they’re the default choice, says Vanguard spokesperson Linda Wolohan. “People are actively choosing these funds,” she notes.“A lot of people say target-date funds are growing because they’re the default, which is true, but a lot of people are buying them on their own.”

Vanguard’s “Target-Date Fund Adoption Report” in 2009 notes that 75% of the defined contribution plans it administers offer a target-date fund option, and 42% of plan participants invest in them. Of this group, half bought the funds of their own volition, Wolohan says. The firm analyzed the holdings of 3.2 million participants in 2,200 DC plans administered by Vanguard.

There are three types of QDIA permitted by the Department of Labor: target-date funds, balanced funds and capital preservation funds. Of all plans at Vanguard that have a designated QDIA, 80% are target-date funds. Around a fifth of Vanguard plans have adopted automatic enrollment; nine in 10 plans use target-date funds as their default.

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