Target-Date Funds Still Misunderstood by Many

By Stephen Miller, CEBS Dec 17, 2012

Only 16 percent of U.S. consumers said they were familiar with target-date funds (TDFs) as an investment option in 401(k) and other defined contribution retirement plans, despite the growing use of these funds as automatic default options in plan accounts, according to a 2012 survey by LIMRA, an insurance industry research firm.

“In 2007, the Department of Labor included TDFs as one of the three qualified default investment alternatives, resulting in tremendous growth of target-date fund assets, which reached $466 billion in the third quarter 2012,” said Cecilia Shiner, senior analyst at LIMRA Retirement Research. “Despite the enormous popularity of TDFs, few consumers understand them, and a majority were unaware if TDFs are available in their employer-sponsored retirement plans.”

According to a December 2012 report by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), 72 percent of 401(k) plans included target-date funds in their investment lineup at year-end 2011, while 13 percent of plan assets were invested in target-date funds at that time and 39 percent of 401(k) participants held target-date funds.

Fewer women were likely to say they were familiar with TDFs than men (10 percent vs. 22 percent), LIMRA found. Consumers under 50 and those with household incomes of $100,000 or more were the most likely to be familiar with TDFs (20 percent and 30 percent, respectively).

While more than half of consumers understood that TDFs provide a diversified mix of stocks and bonds and that they become more conservative over time (that is, bonds become a larger portion of the fund’s assets), one in 10 consumers believed that TDFs included guarantees, become risk free at retirement or require income to be withdrawn in the target year—none of which is a typical feature of these funds (see Test Your Knowledge on TDFs).

The findings are based on 3,531 consumers involved in household financial decision-making. The survey was fielded in May 2012.

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

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