A new survey finds that target-date fund users are more confident than non-users that they will reach their retirement goals, and feel greater comfort with investment decision making. On the other hand, considering how they’re using them, there might be reason for concern.
First the good news: TDF users report contributing more to their accounts than non-users — a median of 2% more of income, according to the survey by Voya Investment Management. The median contribution for TDF users was 8% of income, while the median contribution for nonusers was 6%, with both figures up from a 2013 survey. However, where that difference really stands out at the highest deferral levels: 28% of TDF users are saving more than 11% of pay, compared with just 14% of non-TDF users.
On the Other Hand…
On the other hand, less than one-sixth of survey respondents said they put 100% of their contributions into the plan’s TDF. The mean value was 47% of contributions.
Out of 502 respondents surveyed in 2015 who used TDFs, 425 also reported using other investment options. Ironically, the most common rationale cited was to achieve additional diversification (46%), while 28% each cited to invest more aggressively and to customize their portfolio, though 26% said to invest more conservatively.
These so-called “partial” TDF participants had significantly lower returns than participants in all age ranges who invested at least 95% of their savings in TDFs, exhibiting an average difference of 2.44%, net of fees, according to the report.
Other Findings
Considering those findings, one might well be disinclined to put much stock in the TDF preferences of these individuals. That said:
- Most participants prefer multi-manager TDFs, with a mix of proprietary and nonproprietary funds. Yet many do not fully understand the diversification benefits of TDFs.
- Nearly two-thirds of users prefer TDFs with a “to retirement” asset allocation glide path over a “through retirement” glide path.
- Across all survey respondents who express a preference, nearly two out of three prefer TDFs with a mix of active and passive managers. Fewer than one in four prefer all active and fewer than one in seven prefer all passive.
- Interest in TDFs is linked to generations: Millennials show the highest level of interest, followed by Gen-Xers and then Baby Boomers.
Stressed ‘Tout’?
More than 75% of users feel that TDFs alleviate the stress of retirement planning, 75% report increased confidence that they are making good investment decisions and 72% say TDFs help them feel more assured they will have a successful retirement.
In contrast, 37% of non-users say a TDF would alleviate the stress of retirement planning, only 34% report increased confidence that they are making good investment decisions and 35% say a TDF would help them feel more assured they will have a successful retirement — less than half the rate of TDF users.
