As target date funds become mainstream investment vehicles for defined-contribution plans, users are more confident than non-users that they will reach their retirement goals, according to a new study.
TDF users feel greater comfort with investment decision making, and exhibit other markers of investment success, Voya Investment Management said Tuesday in announcing the results of its third survey of participant preferences in these products.
Voya said the results pointed to several opportunities for plan sponsors to improve participation rates and potentially bolster outcomes for retirement savers.
The poll, conducted in September, comprised 1,005 respondents age 25 and older, all of whom were currently contributing to an employer-sponsored retirement plan and were a primary/joint financial decision maker for their account. Half used TDFs, and half did not.
Sixty-three percent of TDF users in the survey said they were confident that they would reach their retirement goals, up from 53% in the 2011 survey, while only 48% of non-users expressed similar confidence, up from 39%.
More than three-quarters said use of TDFs alleviated the stress of retirement planning and increased their confidence in their investment decisions.
The poll found that greater confidence led TDF users to make higher contributions to their accounts than non-users — a median of 8% of income versus a median of 6%.
This greater degree of confidence extended to outcomes as well: 67% of users said they had a plan to turn their savings into an income stream at retirement, compared with 46% of non-users.
Voya said acceptance of target date funds has steadily progressed as more participants have come to understand their benefits, convenience and features.
The survey results indicated strong interest in auto-features. Seventy-six percent of TDF users said auto-enrollment into the employer’s retirement plan would be helpful for many employees, and 72% said automatic increases of contributions would be helpful.
Many non-users also agreed that auto-enrollment and automatic increases of contributions would be helpful to employees.
Most participants preferred TDFs that incorporate a broad range of asset classes. Eighty-six percent of users expressed interest in TDFs managed by multiple investment advisors to take advantage of their specific expertise.
At the same time, the study found that many respondents did not fully understand the diversification benefits of TDFs. Less than a sixth of said they put 100% of their contributions into the plan’s TDF; the mean value was 47% of contributions.
“We found 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,” Paul Zemsky, chief investment officer for multi-asset strategies and solutions at Voya, said in a statement.
“What they might not realize is that TDFs already contain many baskets, which help accomplish this goal.” Interest in TDFs was highest among millennial respondents, followed by Generation X and then baby boomers. Women and younger employees reported less confidence in meeting their retirement goals than older or male participants.
The majority of participants puts a high priority on wealth protection, especially near retirement.
“A key takeaway for our industry is that we need to increase the level of communication and engagement with plan participants and investors to increase their awareness of the benefits of TDFs,” Voya’s head of intermediary distribution Jake Tuzza said in the statement.
“TDFs represent a building block for retirement portfolios. It’s our job as asset managers to make sure that financial advisors and plan sponsors have access to these products, and can easily explain their benefits, so they can help their clients save for and meet their retirement goals.”
Voya said plan sponsors could take several actions to improve participation rates and potentially enhance outcomes for retirement savers:
- Implement automatic enrollment into a TDF as the plan’s qualified default investment alternative
- Implement automatic escalation of contributions to increase savings
- Increase use of targeted communications to, and engage with, specific employee cohorts to increase awareness of the benefits of TDFs
In other TDF news, the funds lost 0.86% in 2015, their first annual loss since 2008, as measured by Callan Associates’ Target Date Index.
— Check out Top 5 Target Date Fund Families in 2015 on ThinkAdvisor.