It might not be as “set it and forget it” as previously thought. Voya finds two-thirds of plan participants prefer target date funds that offer a mix of active and passive managers. It also shows those who invest in TDFs remain more confident in their investments. However, target date fund investors potentially hurt themselves by holding away too many other assets, harming the underlying glide path mechanism.
Fewer than 25 percent preferred all active, while only one in seven preferred all passive. In addition, the survey found most participants prefer multi-manager TDFs with a mix of both proprietary and non-proprietary funds.
The survey, “Participant Preferences in Target Date Funds: Fresh Insights,” tracks how investor views have evolved in relation to TDFs as they have become more conventional investment products for qualified defined contribution plans.
Among the survey’s other key findings are:
- More than 75 percent of TDF users felt using TDFs alleviated the stress of retirement planning and reported increased confidence that they were making good investment decisions.
- Sixty-three percent of TDF users, up 10% from 2011, felt confident they would meet their retirement goals versus 48 percent of non-users.
- Forty-two percent of respondents chose to invest in target dates because of their simplicity, while 32 percent said that performance was the primary criterion.
- TDF users report contributing more to their accounts than non-users, a median of two percent more of income.
- Diversification is key: Both users (91 percent) and non-users (67 percent) showed a strong preference for TDFs that incorporate a broad range of asset classes. Eighty-six percent of users expressed interest in TDFs managed by multiple investment advisors to take advantage of their specific expertise.
- Interest in TDFs is linked to generations—Millennials show the highest level of interest followed by Generation X and then Baby Boomers. Women and younger employees reported less confidence in meeting their retirement goals than older or male participants.
“What we found was that many participants use other funds to diversify their holdings away from a TDF, in other words, to avoid putting all their eggs into one basket,” Paul Zemsky, chief investment officer of multi asset strategies and solutions, said in a statement. “What they might not realize is that TDFs already contain many baskets, which help accomplish this goal.”
What’s more, the survey found a strong interest in auto features, with 76 percent of TDF users believing that auto enrollment into an employer’s retirement plan would be helpful. Seventy-two percent also felt that auto escalation would be a benefit.
“A key takeaway for our industry is that we need to increase the level of communication and engagement with plan participants and investors to increase their awareness of the benefits of TDFs,” added Jake Tuzza, Voya’s head of intermediary distribution. “TDFs represent a building block for retirement portfolios. It’s our job as asset managers to make sure that financial advisors and plan sponsors have access to these products, and can easily explain their benefits, so they can help their clients save for and meet their retirement goals.”
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.