Participants in defined contribution retirement plans are satisfied with target-date funds as a default for the plans, says a study by AllianceBernstein.
The study, Inside the Minds of Plan Participants and Sponsors, concluded that target-date funds appeal to different types of investors and are a growing segment of the retirement market.
The use of target-date funds in retirement accounts has continued to grow, from 22 percent for active investors and 16 percent for accidental investors in 2005 to 39 percent and 27 percent, respectively, last year, according to a survey of 1,002 plan participants.
The percent that defined themselves as active investors (38 percent) versus accidental investors (62 percent) has remained relatively constant, according to AllianceBernstein, which defines accidental investors as those who are reluctant to invest or save and lack confidence in their investing ability.
The majority of participants from both groups reported being equally satisfied or more satisfied with target-date fund performance compared to other funds in their plans. Eighty-seven percent of the active investors and 72 percent for the accidental investors felt that way.
The two groups like target-date funds for different reasons. Accidental investors like their simplicity and active investors like that target-date funds keep them appropriately invested for their age, according to the survey.
However, the survey revealed a worrisome lack of knowledge about target-date funds, according to AllianceBernstein. Although 67 percent knew that target-date funds become more conservative over time, 34 percent thought the account balance in target-date funds was guaranteed to never go down and 23 percent said they did not know if such a guarantee existed. An almost equal percentage said target-date funds were guaranteed to meet a person’s retirement needs (37 percent) or said they did not know if that statement was true (22 percent).
Seventy-one percent of participants either did not know or overestimated how much they could withdrawn from a target-date fund in retirement without running out of money.
“The crucial issue here is the false sense of security that a lump sum number might convey,” AllianceBernstein says.