Target Date Funds Fail to Live Up to Expectations: Report

The study isolated  the two variables that were thought to be the reasons behind the lower contributions by TDF investors — more younger investors who tend to save less than older investors and more auto-enrolled investors who tend to remain at the usually low preset contribution rate. "But even when those variables were taken out of the equation people were still saving less," says Austin.

"There is something inherent in TDFs that has people using them saving less … But whether there's a flaw in the people or product, we don't know," says Austin. He couldn't identify that inherent factor and suggested instead further study of TDFs and their contribution rates. In addition, Austin suggested that TDFs become more sophisticated, adding variables beyond age to set allocations.

Now TDFs operate as if "everyone in the same age bracket has same investment outlook, attitudes and needs. Maybe that's painting with too broad a brush," says Austin. He suggested that funds consider asking whether participants have a spouse or a pension or other assets outside their 401(k) or about how long they've been with a particular company. "I would like to see more evolution in TDFs, than just birthdate, not complete overhaul but more innovation in the TDF space."

The Alight Solutions study also found other unexpected results among investors using TDFs:

• Many participants investing in TDFs don't remain invested in them for very long. Almost half of those fully invested in TDFs switched out within 10 years, and almost one-quarter left within five years.
• Among those who stopped using TDFs altogether, many chose extreme changes in asset allocations — 46% chose to invest exclusively in equities while 14% chose only fixed income.
• Ten percent of TDF investors invest in multiple TDFs.
• Many plan participants invest in a combination of one or more TDFs plus other investment funds when they are available, which is not the intended use of these funds.

TDFs are intended to be standalone, diversified investments for plan participants who don't want to choose their own asset allocations and funds.

— Check out How to Stop 401(k) Participants From Taking the Money and Running on ThinkAdvisor.