IMHO May 10, 2009
IMHO: Poll Positions
There was an intriguing survey on target-date investing published last week, but one that, IMHO, generates as many questions as answers.
Reported by Nevin E. Adams
The online survey (accurately, if somewhat inelegantly, titled “Investors’ Beliefs about the Role of Target-Date Funds in Retirement Planning”—(see “Workers Might Have Wrong Idea about Target-Date Funds“) captured the sense of 251 respondents, most (55%) of whom were earning less than $50,000/year, but many (75%) of whom were saving for retirement. A full third were age 55 or older, and none was younger than 25. Consequently, while we know nothing about how they are saving, or the size of the programs in which they participate, one might well expect that they have at least a passing familiarity with one of the most popular and powerful 401(k) investment tools—target-date funds.
Not so. Only 16% said they had even heard of target-date funds prior to reading the description in the survey, and apparently even among those, 63% weren’t able to explain the concept. From the response(s) shared (and there weren’t many), it seems that they “got” the date part, but tended to associate that with a maturation of that investment—worse, that on that date, a certain guarantee would be fulfilled.
The survey participants were shown a composite description of target-date funds, drawn from “the collateral of three leading providers,” and then were asked if target-dates promise anything. Presumably at least somewhat influenced by those provider descriptions1, over half (61%) said yes. According to the survey’s authors, when asked what these offerings promised, 69% also got that wrong. Again, the response sampling provided was scant, but suggested that the individuals felt that the funds promised a certain level of financial security—despite market downturns.
That said, in other responses, most (62%) did NOT agree that the funds promised a guaranteed return, nor that those investments would grow faster than other investments (64.5%). A solid majority refused to believe that you would be able to save less in a target-date fund and still meet your retirement goals (70%), nor were they fooled into thinking that there was little or no chance that you would lose money before (76.9%) or after (76.1%) the target-date.
On the other hand, the flip side of those percentages—albeit a distinct minority of the total group—concurred (at least somewhat) with those errant propositions. And that, of course, is a cause for concern, if only because so many participants these days are choosing—or being defaulted into choosing—those target-date solutions2.
Ultimately, however, as I looked over the survey results, I had to wonder: Were the respondents participants in a plan that offered a target-date option? Had they made, or been defaulted into, one of those options? Had they been ill-served by that decision? Do they think they have been ill-served?
Regardless, this survey, like all too many others, paints a picture of participant savers who doubtless need, and probably want, the kind of professional investment assistance that a target-date solution surely can provide. However, it also reveals a group of participant investors who are just ill-informed enough to fall prey to the bad counsel of unscrupulous advisers or to be disadvantaged by the indiscretions of inattentive plan fiduciaries.
We don’t need a survey to point that out to us, of course. But it doesn’t hurt to be reminded.
1The excerpts, in case you were wondering, were:
“Take the guess work out of investing for retirement. Just decide when you want to retire, and we’ll pick the fund that’s the closest fit. A professional fund manager will keep that fund’s investments on target.”
“A target-date fund is a diversified portfolio of funds that offers all the benefits of asset allocation and active management. Just select your age, and we’ll do the rest.”
“You can get closer to achieving your retirement goals, with a little help from target-date funds.”
“We do the work. You do the retiring.”
2Not that, IMHO, a lack of participant understanding or appreciation renders these investments inappropriate, certainly since most participants in the survey sampling seemed to understand the boundaries, even if they couldn’t (to the author’s satisfaction, anyway) articulate them.