Helping Participants Get the Most out of TDFs

Even though TDFs have been gaining some impressive traction in the DC plan space, many participants are not using these investment vehicles in the way they were designed.  

By Javier Simon | December 07, 2016
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Target-date funds (TDFs) are designed to take a holistic approach to retirement investing by utilizing all of a participant’s assets within a unified, evolving portfolio, but many investors are still not using these vehicles as they are intended to be used.

According to the latest “Participant Preferences in Target Date Funds” study by Voya Investment Management, only 10% of participants surveyed allocate all their recurring contributions into a single TDF. More participants (11%) are actually only investing 1% to 10% of their contributions into one or more TDFs, while another 10% invest 41% to 50% of their recurring contributions into TDFs.  

When asked why they use TDFs in this (suboptimal) way, the top reason was to add to diversification (45%), suggesting that plan sponsors may need to re-evaluate how they educate participants about the benefits and features of TDFs.

Susan Viston, client portfolio manager with Voya’s multi-asset strategies and solutions team, spoke with PLANADVISER to offer some tips. First, she suggests identifying investors in the plan who are deviating from investing all or most of their assets into a single TDF, before meeting them with targeted communication and educational materials.

She says plan sponsors should provide “clear and engaging participant education and communication around the TDF to help participants understand not only how they work, but how to select the one that’s right for them.” She adds, “We’ve seen a lot of participants not using TDFs the way they were intended, which we believe can lead to sub-optimal risk profiles and sub-optimal retirement outcomes.”

Sponsors need to clearly explain the benefits of having professionally-managed and diversified portfolios that change asset allocation according to a participant’s age as they near retirement. Viston suggests taking a multimedia approach. “You can’t just have one campaign. Use different forums like videos in addition to brochures and letters,” Viston says.

NEXT: TDF basics are needed