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Target-Date Investors Are More Confident About Retirement Goals
Many are still misinformed about target-date fund basics

By Stephen Miller, CEBS  2/23/2012

Defined contribution plan participants who used target-date funds feel more secure about reaching their retirement goals and managing their portfolios than those who do not, a study by financial services firm ING U.S revealed.

Nearly three-quarters (71 percent) of target-date investors indicated that target-date funds made them feel more confident that they were making sound investment decisions than if they were not invested in target-date funds, according to the survey, conducted Sept. 19-20, 2011, among U.S. participants in 401(k) and other defined contribution plans of all sizes.

While 53 percent of target-date fund users felt confident that they would meet their retirement goals, only 20 percent didn’t feel confident. The remainder were uncertain.

In comparison, 41 percent of nonusers of target-date funds felt confident while 30 percent didn’t feel confident.

Target-date funds provide investors with automatic asset allocation over time through the convenience of a single age- and risk-appropriate investment. With a simplified approach to investing, target-date funds have become increasingly popular among participants and employers that sponsor retirement plans. Target-date assets have grown from $15 billion in 2002 to $363 billion in 2011, according to Morningstar and the Financial Research Corp.

“Like many of the latest 401(k) features, target-date funds have evolved as a way to make saving for retirement easier and more automatic for the average plan investor,” said Rick Mason, president of corporate markets at ING U.S.

Misconceptions Still Prevalent

The survey attempted to gauge not only the preferences of plan participants but also their understanding of key target-date fund concepts. The responses reveal education challenges for plan sponsors. Only 55 percent of target-date fund users knew that target-date asset allocation becomes more conservative over time, although that is the defining characteristic of a target-date fund. In addition, only 38 percent of users knew the products offered all-in-one, hands-off investing, and 20 percent of users thought guaranteed income at retirement was part of their target-date fund investment.

"Retirement professionals should keep in mind that while target-date funds have been widely examined within the investment community, participants are not as well-versed in their features and benefits," according to the report.

Participant Knowledge Levels
The survey asked, "Do you believe the following is true about target-date funds?"
(Responses indicate the percentage that agreed with each statement, whether true or false.)

 

Target-date fund users

Nonusers

They have a diversified mix of stocks and bonds. (true)

63%

51%

Asset allocation becomes more conservative over time. (true)

55%

43%

The stock/bond mix is adjusted automatically. (true)

44%

36%

Offers all-in-one investing. (true)

38%

27%

At the target date, the assets are converted into a guaranteed income. (false)

17%

21%

All target-date fund managers use the same asset allocation mix of stocks and bonds. (false)

13%

8%

At the target date, the money is returned to you.
(false; money remains in the fund unless the participant moves it elsewhere)

10%

9%

None of the above viewed as correct statements.

2%

18%

Retirement plan investment communications aimed at nonusers of target-date funds remains a particular challenge for plan sponsors. More than one-third of nonusers were unsure if their employer-sponsored retirement plan offered a target-date fund option. When asked if they wanted more communication on target-date funds from their plan sponsor, 57 percent of nonusers indicated that they did.

Additional Highlights

Other key findings of the study include the following:

Participants prefer wealth preservation to growth as retirement nears. 80 percent of target-date fund users (and 66 percent of nonusers) preferred protection against investment loss vs. stronger potential for investment gain near and in retirement.

Participants support the use of target-date funds as default investments. 75 percent of target-date fund users (and 53 percent of nonusers) said they were interested in a target-date fund as the default investment option in their retirement plan.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Younger 401(k) Participants Prefer Target-Date Funds, SHRM Online Benefits Discipline, February 2012

401(k) Participants Who Use Target-Date Funds Tend to Stick with Them, SHRM Online Benefits Discipline, September 2011

Plan Sponsors Pick and Choose Funds in Target-Date Series, SHRM Online Benefits Discipline, August 2011

Plan Sponsors Misunderstand Target-Date Funds, SHRM Online Benefits Discipline, November 2010

Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009

Target-Date Funds: Four Key Considerations for Plan Sponsors, SHRM Online Benefits Discipline, April 2008

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