The Effect of Default Target Date Funds on Retirement Savings Allocations

Defined contribution retirement plans increasingly use target date funds as plan defaults with the intent of simplifying investment choices. Many plans also have a larger number of investment options than in the past. We analyze the effect of these investment menu changes on participant asset allocations and equity exposure using a cross section of more than 600,000 TIAA participants. Prior to the adoption of target date defaults, most funds in the sample had money market defaults. Participants who joined plans with a money market default largely switched away from the default fund. They had substantial variation in the equity percentage of their contributions and, in 2012, used a median of three funds for contributions. Women had less equity exposure than men and contributed to more funds, and participants contributed to more funds if the plan offered more funds. Participants who joined a plan with target date defaults behaved differently, with more than 2/3 investing in a single fund, both sexes holding more in equity, women holding fewer funds and the same average equity as men, and with the size effect of the menu becoming insignificant.