The Markets February 2, 2016

TDFs Continue to Breed Investor Confidence

Target-date fund investors are absorbing the lesson that both passive and active investments can play a role in retirement portfolios, according  to new research from Voya Investment Management.
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Voya Investment Management has published the third survey in a series exploring the preferences of target-date fund (TDF) investors, titled “Participant Preferences in Target Date Funds: Fresh Insights.”

According to Voya researchers, the updated data clearly shows that investors’ views have evolved in relation to TDFs. For example, now more than two-thirds of respondents reported they “prefer TDFs that offer a mix of both active and passive managers for enhanced diversification.”

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Voya says it is encouraging to see investors develop an understanding of portfolio diversification strategies that go beyond rote asset class descriptions to consider investing style. Digging down into the numbers, Voya finds “fewer than 25% preferred all active TDFs, while only one in seven preferred all passive,” a reflection of recent equity market swings and an emerging macroeconomic environment judged by many to be much more favorable to active management than the conditions of recent years.

In addition, the survey found most participants “prefer multi-manager TDFs with a mix of both proprietary and nonproprietary funds.” Importantly, Voya notes, these findings only stand for the cross section of investors who actually took the optional step of expressing a preference on this particular segment of the survey. There was a sizable swath of the 1,000-plus respondents who did not choose a preferred TDF strategy, whether active, passive or blended—suggesting a need for ongoing basic investment education, even among TDF investors.

“Overall, we found investors value the diversity [available through TDFs],” explains Paul Zemsky, chief investment officer for multi asset strategies and solutions. “One problem we found was that many participants use other funds to diversify their holdings away from a TDF, in other words, to avoid putting all their eggs into one basket. What they might not realize is that TDFs already contain many baskets.”

Even with some lasting TDF misunderstandings, Americans are gaining modestly in retirement confidence. Among participants ages 25 to 49, 44% agreed with the statement, “I’m confident that I will reach my retirement goals,” whereas 54% of those older than 50 said they were confident. Across all age groups, men expressed higher confidence than women, Voya finds, suggesting that it “may be beneficial for educational programs about target-date fund benefits to focus on younger participants and women.”

NEXT: Millennials are big fans of TDFs

Voting with their dollars, Millennials show greater interest in TDFs than do Generation Xers or Baby Boomers, likely because they have been introduced to them from the very beginning of their careers.

“Use of TDFs is likely to increase as Millennials come to represent a greater portion of plan participants, and the use of auto-features continues to gain traction,” Voya predicts. “Millennials also show keen awareness of the need to save for their retirement, even though significant numbers of them have postponed doing so.”

As the Voya data shows, few one-off actions can boost retirement confidence the same way as enacting a regular salary deferral into a TDF. A strong majority of current TDF users, more than 75%, felt using TDFs alleviated the stress of retirement planning and reported increased confidence that they were making good investment decisions. Beyond this, 63% of TDF users, up 10% from 2011, felt confident they would meet their retirement goals, versus just 48% of non-users. Median deferrals into TDFs, finally, represent 2% more of investors’ income compared with non-users.

Similar to past surveys, Voya finds many (42%) choose to invest in TDFs “because of their simplicity,” while a smaller number (32%) said that performance was the primary criterion. Diversification is also key: Both users (91%) and non-users (67%) show a strong preference for TDFs or other products  that incorporate a broad range of asset classes.

“Eighty-six percent of users expressed interest in TDFs managed by multiple investment advisers to take advantage of their specific expertise,” Voya says. “What’s more, the survey found a strong interest in auto features, with 76% of TDF users believing that auto enrollment into an employer’s retirement plan would be helpful. Seventy-two percent also felt that auto escalation would be a benefit.”

The research concludes interest in TDFs is linked to generations—Millennials show the highest level of interest followed by Generation X and then Baby Boomers. More information about this and other Voya research is at www.voya.com.

Data & Research February 2, 2016

Retirement a Key Factor in Getting African-Americans to Invest

“If anyone were ever poised to invest with confidence, it’s the black community,” says Mellody Hobson, president of Ariel Investments.
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Middle-class African-Americans are investing more in the stock market than they have in over a decade, according to the Ariel Investments 2015 Black Investor Survey.

The survey of 500 black and 500 white households with incomes of at least $50,000 found that 67% of African-Americans are invested in stocks or stock mutual funds, compared to 86% of whites. While blacks are still comparatively under-invested in stocks when compared to white households, that percentage is on an upward trend, from 60% in 2010 and 57% in 1998, the first year Ariel conducted the study. White household investing has also risen since 2010, from 79% to 86%.

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Seven in 10 African-American investors cite workplace retirement plans as a contributing reason for becoming an investor—double the rate of the next most common reason—having extra cash on hand they wanted to grow. More than half of African-American investors say workplace plans are the most important reason for becoming an investor—more than four times more common than having extra cash. For white investors, workplace retirement plans are also an important reason, but to a slightly lesser degree (63% cite them as a reason, while 45% say they are the most important reason).

Furthermore, for non-investors, retirement plans were cited as the most likely entry point into the world of investing. When non-investors were asked their likelihood to invest under various circumstances, 58% of African-Americans and 63% of whites said they would be likely to invest if their employer offered a good 401(k) plan.

“Clearly, access is a key factor,” says Mellody Hobson, president of Ariel Investments. “My hope is that as more employers offer retirement plans, we will continue to see both white and black participation in the market continue to rise, better preparing everyone for retirement and other financial goals.”

NEXT: Other factors leading African-Americans to invest

The survey found that retirement is a rising priority for both racial groups. In 2000, 33% of African-Americans said their most important goal for saving and investing was for retirement. This year, 44% of African-Americans see retirement savings as most important— more than twice as many as those that save for any other goal. In 2000, about half of whites were focused on retirement savings. In 2015, six in 10 whites state this as their primary goal.

The study found that income is a key factor in African-American stock market participation, with only 57% invested at the income range of $50,000 to $100,000 compared to 81% at the range of $100,000 and more. For whites, the discrepancy was smaller (83% versus 92%). A high level of education is also a predictor for African-Americans participating in the market. Blacks with a graduate degree have a 72% participation rate, as compared to college graduates and below, who participate at a rate of 63%. For whites, the difference is not statistically significant (88% versus 86%).

The survey also found age plays a role in investing. The lowest participation in the stock market among African-Americans is among seniors: only 56% of those 65 and older are invested (compared to 88% of whites in that age bracket). For whites, the lowest participation was among those younger than 40 (73%) while the black younger-than-40 demographic followed closely behind (67%).

African-Americans are more optimistic about the economy than their white counterparts, according to the survey. Compared to whites, African-Americans are more likely to feel hopeful about the current U.S. economy (75% vs. 50%), feel that the economy has fully recovered or is on its way to full recovery since the recession (65% vs. 40%) and feel bullish about the stock market (65% vs. 53%). These findings are in stark contrast with the results of the 2010 survey, when just 43% of African-Americans were bullish compared to 60% of whites.

“If anyone were ever poised to invest with confidence, it’s the black community,” says Hobson. “This optimistic sentiment marks a time of tremendous opportunity, not only for African-Americans to take further advantage of the stock market’s wealth building potential, but also for the financial services industry to reach out to this historically under-served group.”

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