Target date fund investors may be happy with their plans — but they don’t seem to be using them properly, according to a new study by
AllianceBernstein LP.
The study found that 76% of defined-contribution-plan participants who are using target date funds think these all-in-one investment options provide better performance than they could get if they selected individual mutual funds on their own.
Eighty-six percent of all target date fund users plan to maintain or increase their investment in such funds.
However, the same study found that only 19% percent of the more than 1,000 participants polled had put 80% to 100% of their assets in a target date fund – the way in which they are intended to be used. Sixty-percent of those investors don’t want to put all of their assets in a single target date fund because they “don’t want to put all of their eggs in one basket,” according to a release issued by
AllianceBernstein.
“We believe that both the financial services industry and plan sponsors can use these findings to improve the investment solutions and communications programs offered through defined contribution plans — all with the goal of helping employees to be well-prepared for retirement,” said Cathy Peterson, senior marketing director in
AllianceBernstein’s defined-contribution-investments group.
But communications and education may not be enough to get plan participants to understand the intricacies of target date funds, said Kevin Price, chief investment officer at Interlake Capital Management LLC, a registered investment adviser. “People are busy and distracted and in some cases simply not sophisticated enough with regard to these issues,” he said.
Mr. Price doesn’t recommend to his plan sponsor clients that they use target date funds in their 401(k)s because he thinks they are too opaque and it’s often unclear what their end goals are — particularly whether they are trying to provide investors enough savings until the point of retirement, or until they die, he said.
“It doesn’t fit my fiduciary duties,” Mr. Price said. “We don’t talk about target date funds because people who are 60 years old or 20 years old are going to have varying financial objectives, outside assets and so forth, and so to us target date funds don’t make a lot of sense.”
The average target date fund returned 14.1% during the third quarter, slightly below the Standard & Poor’s 500 Index, which gained 15.6%, according to Ibbotson Associates Inc. Average net flows into target date funds slowed in the third quarter to $11 billion, down from the average of $18.6 billion for the past four quarters, according to Ibbotson.
