February 22, 2012

TDF Investors Report High Levels of Retirement Confidence

Investors want protection against losses, guaranteed income

Over two-thirds of investors with assets in target-date funds feel more secure about their retirement than those who are not invested in TDFs, a report released Tuesday by ING U.S. found, and nearly three-quarters say they are confident that they’re making good investment decisions.

At the end of December 2011, TDF assets totaled $381 billion, according to Strategic Insight. McKinsey & Co. projected in 2010 that by 2015, TDFs would account for between 35% and 40% of all DC plan assets.

The report, “Participant Preferences in Target-Date Funds: Examining Perceptions and Expectations Among Target-Date Users and Non-Users,” found 80% of TDF investors say they want funds that provide better protection against investment losses in the years immediately prior to and during retirement. Two-thirds of investors who did not have a TDF agreed. Among non-users, 15% say they prefer investments with a strong potential for gain, but 19% reported no preference.

TDF users and nonusers alike expressed an interest in funds that offered guaranteed income options. Eighty-eight percent of TDF users and 68% of nonusers expressed an interest in products with such features.

Respondents were almost equally interested in funds that offer exposure to multiple asset classes and those that utilize multiple managers. “Given this participant preference for diversification, it’s important for plan sponsors to determine that their target-date offering, which is designed to be a comprehensive single-portfolio solution, actually provides adequate diversification,” according to the report.

The survey also endeavored to determine how well participants understand target-date funds. The survey found just over half of TDF users understood that their asset allocation would become more conservative over time and 36% knew what a glide path was. “Retirement professionals should keep in mind that while target-date funds have been widely examined within the investment community, participants are not as well-versed in the features and benefits of TDFs,” according to the report.

Despite participants’ eagerness to invest in target-date funds, the products took a beating in 2011. A report from Ibbotson released Jan. 23 found that TDFs returned just 6.8% in the fourth quarter of 2011, compared with 11.8% for the S&P 500 Index. For all of 2011, the average TDF lost 1.6%.

Another report, this time from SmartMoney, which analyzed data from Morningstar, found that the average fund four years out from its target date fell 0.4% in 2011. By comparison, the S&P 500 gained 2% and the Barclays Capital Aggregate Bond Index gained 8%.

ING Investment Management acknowledges that in 2011, the S&P 500 and Barclays Capital

Aggregate Bond indexes were two of the best performing benchmarks in 2011, but notes that other indexes, such as MSCI EAFE, MSCI Emerging Markets and Russell 2000, underperformed the average target-date manager over this same time period. 

Furthermore, according to ING, in 2010 and 2009, the Barclays Capital Aggregate Bond and S&P 500 were two of the weaker performing indices.

“Over short periods of time, we believe that it is difficult to judge the diversification benefits that target date funds provide through investments in a broad range of equity and bond sub asset classes, relative to a more concentrated approach (i.e. only investing in S&P 500),” Susan Viston, vice president and senior portfolio specialist for ING Investment Management, told AdvisorOne. “Over longer periods of time, we believe broad diversification should lead to higher risk adjusted returns relative to a more concentrated approach. That being said, there are significant differences between Target Date managers in terms of philosophy and approach that can lead to wide variations in performance and risk exposure. Therefore, we would recommend that participants review a target date manager’s approach to asset allocation to make sure it is consistent with their risk tolerance and retirement objectives.”

The ING survey was conducted online among 540 defined-contribution participants in September 2011 by Synovate for ING Investment Management U.S. and the ING Retirement Research Institute. 

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