In 2021, the percentage of defined contribution plan participants using professionally managed portfolios—which can include target-date funds, managed account programs, and traditional balanced funds—reached an all-time high of 64%. The vast majority of these participants held their plan assets in a single target-date fund.

“One of the primary benefits of target-date funds is continual rebalancing—which is especially important during volatile markets like the one we’re in right now,” said Jeff Clark, author of How America Saves 2022 and a member of the Vanguard Strategic Retirement Consulting team. “The research has shown that pure target-date-fund investors are about five times less likely to trade compared with other investors.”

In short, the shift toward professionally managed portfolios helps participants stay the course, even—or perhaps especially—during choppy markets.

Another boon associated with the uptick in professionally managed portfolios: a huge increase in diversification levels. In 2005, just 39% of participants maintained a balanced strategy. By 2021, that number had shot up to 78%.

“If you look back over the past 15 years, there has been a dramatic shift toward more age-appropriate allocations,” said Clark. “That shift is even more pronounced among younger participants, who have greater potential to benefit from the power of compounding,” said Clark.

Vanguard’s Insights to Action commentary, which complements the How America Saves 2022 report, identified three key ways that plan sponsors can support participants’ financial well-being with professionally managed allocations. In designing their plan, sponsors would do well to:

1. Offer an advice option (as discussed here);
2. Establish a qualified default investment option (QDIA)—and make that QDIA a target-date fund; and
3. Reenroll participants into an appropriate target-date fund.

The takeaway for plan sponsors? Taking one or more of these steps can encourage properly diversified portfolios across age cohorts and help boost participants’ long-term financial success.