Among defined contribution retirement plan participants using target-date funds, 76 percent think that these funds provide better performance than would a mix of investments they selected on their own, according to research by investment management firm AllianceBernstein. Moreover, the global recession and stock market drop in late 2008 and early 2009 haven’t changed participants’ overall attitudes toward investing, confirms the October 2009 study report, Inside the Minds of Plan Participants.
The report analyzes a survey of more than 1,000 U.S. workers whose companies offer defined contribution plans such as 401(k)s. The research was conducted in March 2009, prior to the market’s subsequent partial rebound and arguably the point of most severe pessimism.
“Given the recent focus on target-date funds in light of the market crisis of 2008, we looked carefully at how participants view these funds and what features they feel are important for reaching their retirement goals,” said Richard A. Davies, head of product strategy for AllianceBernstein's defined contribution investments unit. “Eighty-six percent of all target-date users told us that they planned to maintain or increase their current level of investment in target-date funds, which demonstrates that these investors are generally satisfied.”
However, “This year’s study also demonstrates that regardless of the market environment, the majority of respondents still lack confidence in their overall ability to make good investment decisions,” added Cathy Peterson, senior marketing director at AllianceBernstein. “We think that the simplicity of target-date funds, coupled with a guaranteed-income feature, will go a long way toward helping participants attain a financially comfortable retirement.”
Key findings from the research report are provided below:
• Workers’ confidence that they’ll have a comfortable retirement plunged at the start of 2009. Only 18 percent of respondents reported being confident or very confident that they’ll have a comfortable retirement—the lowest level reported in the five years the study has been conducted. As a point of comparison, 41 percent of respondents reported being confident or very confident when asked the same question in 2007.
• Most want control, but they lack experience in making investment decisions. When asked to describe how they feel about investing:
✓38 percent of respondents would be categorized as “active” investors; they enjoy making retirement savings and investment decisions and are confident about their retirement prospects.
✓62 percent are what the report terms “accidental” investors; they don’t enjoy investing, don’t pay much attention to it and are not confident in their ability to make investment decisions.
Whether , “active” or “accidental,” most investors indicate that they lack experience in making investment decisions. More than two-thirds of accidentals feel unsure about investing, and only 7 percent feel experienced or very experienced. For actives, surprisingly, only 39 percent state they’re experienced or very experienced with regard to making investment decisions.
• While target-date funds appeal to both types of investors, “actives” are more likely to choose them. Twenty-nine percent of active investors currently invest in target-date funds. Key reasons for their selection include that they are easy to understand and will keep participants appropriately invested throughout retirement. This is in comparison to 21 percent of accidental investors, who cite target-date funds’ simplicity and the fact that they are managed professionally as key drivers of the decision to select them.
In addition, 84 percent of actives and 88 percent of accidentals say they intend to maintain or increase the amount they invest in target-date funds over the subsequent two years.
• While target-date funds are growing in appeal, many respondents seem to misunderstand how to use them. Only 19 percent of participants have put 80 percent to 100 percent of their plan assets in a target-date fund. Almost 60 percent of those who don’t use a target-date fund as a comprehensive solution state that they don’t want to put all of their eggs in one basket by allocating 100 percent of their assets to such a fund. Many investors do not understand that target-date funds seek to provide a fully diversified and retirement age-appropriate investment.
“This research clearly uncovers the participants’ desire for simplicity and an increased level of confidence when it comes to investing for retirement,” says Peterson, who would like to see the financial services industry and plan sponsors improve their education and communications programs “with the goal of helping employees to be well-prepared for retirement.”
Stephen Miller is an online editor/manager for SHRM.
Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009
Target-Date Funds Receive Greater Scrutiny, SHRM Online Benefits Discipline, June 2009
Hitting the Target with Target-Date Funds, SHRM Online Benefits Discipline, August 2007
SHRM Online Benefits Discipline