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Target-Date Fund Misperceptions Abound

A surprising number of participants think target-date funds are guaranteed — with some even more surprising rationales for that belief, according to a new survey.

Target-date fund users most frequently say that those funds keep them appropriately invested to and through retirement (34%), and like that they are easy to understand (30%), according to a recent survey by AB. A quarter (27%) know that a professional money manager invests those assets according to the participant’s timeframe. On the other hand, those who don’t choose to invest in TDFs say that they don’t know enough about those offerings (42%), though 35% say their employer doesn’t offer that option, and 28% feel that the TDF takes away control they want.

Of course, nearly a quarter (23%) of all participants don’t know if they are in a target-date fund or not.

However, in the 2015 survey, 34% of target-date fund users believed that vehicle would guarantee they’ll meet their income needs in retirement, up from 22% in the prior year’s survey. Moreover, while in 2014, 26% thought that those investments were FDIC-insured, by 2015 that had increased to 36%. Among non-TDF users only 16% and 18%, respectively were of those incorrect opinions.

Missed Beliefs

Among those who believe target-date funds are guaranteed, 38% of TDF holders say the year listed in the fund name tells them their accounts are guaranteed to be sufficiently funded in that year, and even more (47%) claim that the materials they received led them to that conclusion. A third (34%) of TDF users say the representative said the funds were guaranteed. Those findings were about twice as bad as the 2014 survey, where, among those TDF holders who thought the funds were guaranteed, 19% attributed that belief to the fund materials, a like number to the year listed in the fund name, and 15% to the representative representations.

Asked what features and benefits they most want from their defined contribution plan, workers overwhelmingly (69%) cite a steady income stream in retirement (it has topped the list in the past seven iterations of this particular survey. Protection of principal was next-most cited (44%), just ahead of “investing in a well-diversified mix of investments” (42%), and not very far ahead of “withdrawing money with no fees of penalties” (38%).

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