Employee Misperceptions About Target-Date Funds

The risks of target-date funds are poorly understood by employees

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Target-date funds are often marketed as fix-it-and-forget-it funds for people who know little about asset allocation. They typically provide a mix of investments including stocks, bonds, and cash that grow more conservative as you approach a retirement date of your own choosing. New employees are often automatically enrolled in target-date funds if they don’t specifically opt out. In fact, the most popular default investment option for 401(k)s is currently target-date funds, which 53 percent of 401(k) plans used in 2008, up from 35 percent in 2007, according to the consulting firm Greenwich Associates.

But a new survey indicates that target-date funds, and especially their risks, are poorly understood by investors. A recent online survey by consulting firm Behavioral Research Associates and asset management company Envestnet found that only 16 percent of participants said they had ever heard of target-date funds prior to reading the description. The 251 employed individuals between ages 25 and 70 in this admittedly small survey were then shown a description of target-date funds using a composite of actual promotional material from three leading providers of target-date funds. After viewing the material the participations were shown as series of statements about target-date funds and asked to agree or disagree. Here is how many participants agreed with each statement.

  • You will be able to retire on the target date. (62 percent)
  • You can spend less time tracking your progress toward your retirement goals. (62 percent)
  • You can stop worrying about investment and savings decisions and leave everything up to an investment professional. (49 percent)
  • You will earn a guaranteed return. (28 percent)
  • Your money will grow faster than other similar investments. (36 percent)
  • You can save less money and still meet your retirement goals. (30 percent)
  • There is little to no chance that you will lose money after the target-date. (24 percent)
  • There is little to no chance that you will lose money before the target-date. (23 percent)
  • Source: Behavioral Research Associates and Envestnet, 2009.

    For the record, none of these statements is completely true and many are downright false. Additionally, about 57 percent of the participants thought there was no or a low chance that money in a target-date fund could be lost over a 10-year period. But retirement savers can and did lose money in target-date funds in the past year. It remains to be seen if those losses will be recouped within the decade.

    And while it’s true that target-date funds do grow more conservative over time, asset allocation varies wildly among different funds. The percent of the fund allocated to equities for employees 10 years from retirement varied from 40 percent to 80 percent among target-date funds in 2006, according to an analysis by consulting firm Watson Wyatt. On a worker’s designated retirement day, equity allocations ranged from 20 percent to 65 percent. Individual investors should make sure that target-date funds offered by an employer carry a level of risk they are comfortable taking on.