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Plan Sponsors Misunderstand Target-Date Funds
Just 34% now believe target-date funds are the best default, down from 57% in 2009

By Stephen Miller  11/15/2010

Sponsors of 401(k) and other defined contribution (DC) retirement plans are unaware of or unsure about many key aspects of target-date funds, despite the fact that more plans are offering these funds as an investment option, according to a survey by Janus Capital Group, a global investment firm.

The survey, fielded from July to September 2010, reflected comments from a cross-section of more than 6,300 DC plan sponsors from a wide range of industries across the U.S. Conducted annually, the survey focuses on qualified default investment alternative (QDIA) selection, monitoring and satisfaction.

The survey revealed that a significant percentage of sponsors are still unclear about many aspects of the target-date funds in their investment menus. For instance:

Compared to 2009 findings, in 2010 more plan sponsors don’t know what the end date of the glide path is in their target-date funds (50 percent compared to 32 percent in 2009).

More than one-third of all plans are not familiar with the “to” or “through” glide path dilemma—that is, whether a fund is expected to be held only to the stated retirement year, or if the fund is expected to be held through the retirement years are thus to maintain long-term growth by holding a higher percentage of stocks.

35 percent of plans (compared to 29 percent in 2009) are not sure what the best QDIA option is for their employee population.

“Given the industry-wide scrutiny on target-date funds, we were surprised at the amount of uncertainty the survey data revealed,” said Russ Shipman, senior vice president and managing director of Janus’ Retirement Strategy Group. “The findings reveal a disconnect, as respondents believe they’re less than well informed about their chosen target-date offerings but remain confident their employees understand the products and use them correctly.”

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Plan sponsors believe they’re less than well informed
about their target-date offerings but remain confident
their employees understand these products.
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Favoring Other Options

In addition, the survey found that plan sponsors' perceptions of target-date funds, as compared to other QDIA options, are shifting. An increasing number of sponsors indicated that they believe that the best QDIAs for their employee populations are balanced funds and target risk funds, with holdings that reflect a stated risk-tolerance level such as low, medium or high, rather than holdings that shift to lower-risk assets as a stated retirement year approaches.

In 2010, just 34 percent of respondents indicated that they believe that target-date funds are the best QDIA for their plan, down from 57 percent in 2009. Additionally, when asked to compare QDIA options based on fees, transparency, overall performance, risk management and correct usage by participants, balanced funds saw gains each category compared to 2009 while target-date funds saw declines.

“With these fairly pronounced changes in plan sponsor perceptions about QDIA options, it seems possible, if not probable, that many early target-date adopters are rethinking their selections,” said Shipman. “Target-date funds are surely a good choice for many, but we continue to believe that balanced funds and other target risk solutions will hold their own—due largely to their simplicity and proven performance histories. The data in the survey suggests we may be on to something.”

In Defense of Target-Date Funds

In a Q&A published in the November 2010 issue of PIMCO DC Dialogue, Shlomo Benartzi, chief behavior economist for Allianz Global Investors, defended target-date funds as a default option, stating:

"There's been a lot of criticism of target-date strategies and I'm not saying that we couldn't do a better job, but I think a lot of the criticism is misplaced.

"First, a lot of the current criticism is not really about target-date funds, but about the financial crisis. If you look at any other type of investment, you know that people lost a lot of money in those products during the crisis. So, there's confusion about how much the glide path and target-date funds actually contributed to DC account balance losses versus how much participants would have lost anyway by investing in other investment choices.

"Second, if you build any fancy economic or asset allocation model to determine the optimal glide path, the optimum model may say you need to have 70 percent in stocks at a certain age. But if you end up with 80 percent or 60 percent, it hardly makes any difference over the participant's career. So, from a utility perspective, you don't have to get it perfectly right; you just don't want to make big mistakes."

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

SEC Proposes Rules to Disclose Risks in Target-Date Funds, SHRM Online Benefits Discipline, September 2010

Labor Department, SEC Issue Target-Date Fund Guidance, SHRM Online Benefits Discipline, May 2010

Target-Date Funds Bounce Back in Retirement Plans, SHRM Online Benefits Discipline, March 2010

Participants Mostly Satisfied with Target-Date Funds, SHRM Online Benefits Discipline, October 2009

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

DOL Issues Final 401(k) Default Rules, SHRM Online Benefits Discipline, October 2007

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