Investors like target date funds, but investors don’t understand target date funds. That’s the findings of the latest survey of 401(k) plan participants from AllianceBernstein, which reports that over a third of target date investors believe the product is guaranteed.
An overwhelming 87% of participants reacted favorably when asked how they would feel if their employer automatically invested their contributions into a TDF. And if it were a target-date solution with a guaranteed income stream for life, the response was even more favorable. Nearly 90% of all employees indicated they would keep some or all of their contributions in a guaranteed-income TDF if plan sponsors automatically enrolled them into one of these funds.
However, despite more education and awareness of the product, misperceptions around TDFs have risen since 2014’s survey. Fully 23% of participants don’t know if they invest in a TDF or not. More target-date users (34%) than last year (22%) also incorrectly believe that their TDFs automatically “guarantee you’ll meet your income needs in retirement.”
Overall, the research showed a continued decline in 401(k) defined contribution plan participants’ understanding of investing in general. These findings reflect the broader lack of financial literacy among workers.
“America’s retirement readiness is nowhere near what it needs to be. It is even more troubling that we are seeing a decline in workers’ retirement savings knowledge from previous years,” Richard Davies, senior managing director and global head of defined contribution at AllianceBernstein, said in a statement. “It is not surprising that in this environment of declining confidence and misunderstandings, participants would benefit from features like auto-enrollment and auto-escalation into TDFs as a means to getting them started and saving more for their retirement.”
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
