(Dow Jones) Target-date funds have become a key feature of many retirement plans, but employers may still need more help picking the right ones, according to a new study by the Government Accountability Office.
The funds, also known as life-cycle funds, are supposed to be an all-in-one retirement vehicle. Target-date funds typically hold a mix of stocks and bonds that grows gradually more conservative as an investor's "target," or retirement, date approaches. Even as target-dates' popularity has surged-funds now hold roughly $330 billion-many faced criticism after posting big losses during the financial crisis.
The Securities and Exchange Commission and the Department of Labor have already recommended a number of changes to the way the funds are labeled. But the GAO, responding to an inquiry from Congress, says some questionable premises incorporated into funds' designs mean changes could go still further.
Target-date funds are "designed based on certain key assumptions about participant actions that may not match what participants actually do," the GAO study concludes. Among key concerns: While most target-date funds are designed on the premise investors will slowly start withdrawing money after retirement begins, some research has shown workers typically yank out big chunks quickly.
Also while target-date funds are often designed on the belief workers will salt away a certain percentage of their salary each year, the GAO found "participants generally start saving later and do not save at the rates generally assumed."
While the GAO didn't recommend any specific changes to the way the target-date funds are operated, it suggested fund companies provide more information about fund designs to employers and that employers tell employees more about what is expected of them in terms of saving and withdrawing.
At least one outside expert that reviewed the study says the findings regarding target-date confusion ring true.
Many employers, especially smaller ones, "aren't doing enough homework," says Ryan Alfred, president of BrightScope Inc., a company that does retirement plan research.
The study, which will be released this week, was conducted at the request if Sen. Herb Kohl. (D-Wis.), chairman of the Senate Special Committee on Aging, and Rep. George Miller of California, the ranking Democrat on the House Committee on Education and the Workforce.
"The GAO's report shows that participants that choose target-date funds might not be fully aware of how these funds work," said Sen. Kohl in a statement. "I think it is clear that both plan sponsors and participants need more information."
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