November 7, 2011

Target-Date Funds Payout Often Misunderstood: Survey

Investors understand basics, but are mistaken about expectations

Defined contribution plan participants, by and large, understand what target-date funds are and how they work, with a notable exception: they have unrealistic expectations about what those funds will provide upon retirement, according to a survey from AllianceBernstein released Monday.

Survey respondents fall into two groups, says the company: active investors (43%) who indicate that they enjoy making decisions about their retirement funds and who are confident about their retirement prospects, and accidental investors (57%) who don’t enjoy it, don’t pay much attention to it, and are not confident about their ability to make such decisions.

The survey, titled “Inside the Minds of Plan Participants,” found that the vast majority—81%—of employees are also equally or more satisfied with target-date funds, compared with others offered by their plans. However, 51% mistakenly believe that such funds will guarantee that they will have sufficient retirement income. When broken down by group, that mistaken belief is even more prevalent among active investors than the accidentals, with 59% of the former and 38% of the latter saying that is the case.

The disconnect comes with participants’ understanding of what constitutes a prudent range of withdrawal from retirement funds to enable those funds to last through retirement years. Of respondents, 73% could not identify the effective range of drawdown on a $500,000 balance. Rather than the 1-3% or 4-6% ranges most financial experts consider reasonable, respondents instead chose 7-9%, 10%+, or said they didn’t know.

Thomas J. Fontaine, head of AllianceBernstein defined contribution investments, said in a statement concerning the results, “We’re pleased to see such high levels of usage and satisfaction of target-date funds—as well as a broad understanding of their basic features. Clearly the growing popularity of target-date funds, combined with concerted efforts to better educate participants about target-date fund features, objectives and risks, is leading to increased satisfaction and comprehension. However, the belief by half of all participants that using these funds guarantees that they will have sufficient income in retirement indicates we still have more work to do.”

He continued, “This finding is somewhat understandable. Our survey revealed that the top reason participants invest in a target-date fund is that they believe it keeps them invested ‘to and through retirement,’ a strong indication that participants value a strategy that helps put them on a good path to not only building retirement savings, but also carrying them through retirement by providing sustainable income.”

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