Are target-date funds being used as they were intended? Carol Waddell, vice president of product management for T. Rowe Price, posed this question to attendees on Monday at the Center for Due Diligence’s 2011 conference in Chicago.
The simple answer, according to Waddell, is yes.
Roughly 80% of investors are what a survey from T. Rowe Price call “delegators.” Furthermore, “active” investors often make bad decisions in their investments.
Automatic solutions are effective ways to increase participation; 90% of investors in plans with automatic enrollment maintain defaults, according to Waddell.
Furthermore, 65% of investors overall use target-date funds. Over half of investors have over 90% of their assets in a TDF, while 94% of investors use only one target-date fund.
The T. Rowe Price survey identified several participant behaviors. Those without asset allocation products have extreme allocations for their age, but they tend to naturally reduce their allocations to risky investments as they get older. Self-directed investors generally tend to chase performance and do not understand fixed income.
Offering too many choices has a negative effect on decision making, Waddell said. A study by T. Rowe Price with T. Rowe Price partnered with Columbia, NYU and Behavioral Research Associates found that while target-date options have the highest participation rates, offering multiple solutions in a retirement plan doesn’t have a negative effect on individual solutions.
Advisors can optimize target-date funds by leveraging them as qualified default investment alternatives. Additionally, advisors can use plan “resets” to move participants into age appropriate TDFs. T. Rowe Price found that 18 months after implementing a reset, almost three-quarters of assets are still in TDFs. Eighty-four percent of participants are investing in TDFs and 74% have 100% of their assets in TDFs.