Target-date fund adoption is high and will continue to rise among plan sponsors and consultants for defined contribution plans, according to a new report by Vanguard, Greenwich Associates and Research Now.
Plan sponsors and consultants were interviewed about their attitudes about target-date funds earlier this year. What the online survey found is that among those who don't offer TDFs, 58 percent plan to add the investments over the next two years.
"Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date," According to the report.
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Cost and complication of changes to the investment lineup and the absence of good benchmarks were the top two reasons cited by respondents for not currently offering TDFs. "It may be more sensible to add TDFs to their lineup in combination with another plan event such as a merger/acquisition, recordkeeper change, or a larger-scale investment menu redesign," the report said.
Target-date funds are "considered a better single-fund solution, easier for participants to select, and easier to understand during periods of market volatility when compared with a 60/40 static balanced fund," according to the report. Some plan sponsors and consultants consider TDFs to be riskier and more complicated.
Attitudes toward TDFs have become more favorable relative to other investment options during the past three years, the report found. Respondents also believe that TDFs are appropriate to include in multifund portfolios or as a single-fund option.
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