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Target Date Funds Misunderstood

A survey by ING revealed gaps in investor understanding of how target date funds are designed, how they are managed, and what they are designed to do. The survey interviewed 540 defined-contribution plan participants. Within this group, 212 invested in target date funds and 328 did not.

A target date fund provides exposure to a variety of assets, most notably large-cap stocks and bonds, and adjusts its allocation as it approaches a specified date (e.g., 2020). These funds are designed to give investors a simple option for reaching their long-term goals. Their management styles and allocation strategies can very widely, however, with some funds designed to make an abrupt shift in allocations at the target date (the “to” approach) and others designed to make a gradual change (the “through” approach). Hence, the opportunity for misunderstanding and confusion about these funds is high.

An example of the confusion concerns controlling risk. More than 70% of all respondents (79% of target date fund users and 71% of non-users) said they wanted stronger protection from investment losses. Yet only about half (55%) knew a target date fund’s allocation was designed to become more conservative over time. Worse yet, just 44% thought the allocation would be automatically changed over time. And just 53% were confident they would reach their retirement goals. (Among respondents who did not use target date funds, the percentages were even lower.)

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