Despite being one of the most popular investments in modern 401(k) plans, when it comes to TDFs, most participants apparently remain completely unaware of what they are and how they work.
It's an observation made by a recent LIMRA survey and it suggests that retirement advisors and plan sponsors have plenty of educational opportunities to let participants know how and why TDFs work – especially if those participants already have them as part of their 401(k) portfolio. And as TDFs are expected to become the predominant component in 401(k) investments in the future.
The good news, however, is that those consumers who've taken the time to learn about TDFs tend to have a much higher level of confidence in their own retirement future. The general public, not so much.
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The survey found that consumers understood very little about the mechanics of target-date funds, with more than 10 percent convinced that TDFs came with guarantees, became risk-free at retirement or that they required income to be drawn out at the target year.
Those do-it-yourselfers, the IRA owners, were asked the same questions and a higher percentage claimed to be clear on how TDFs worked, but when quizzed on the working parts, LIMRA researchers found that they knew just as little as standard DC participants.
The issue, the organization says, is that more than 70 percent of 401(k) plans offer TDFs and 36 percent of participants currently have money invested in them, but only 16 percent of consumers said they were familiar with TDFs at all.
"In 2007, the DOL included TDFs as one of three QDIAs, resulting in tremendous growth of assets, which reached $466 billion in the third quarter of 2012," notes Cecilia Shiner, a senior analyst with LIMRA Retirement Research.
"Despite the enormous popularity, our study revealed that few consumers understand them and the majority is unaware if TDFs are available. Before the industry can successfully explain the intricacies of these funds and how they differ by investment provider, consumers need some back-to-basics education."
Participants who do know a thing or two about how TDFs work and who hold TDFs in their investments also told LIMRA researchers that they have a much higher confidence level in their post-retirement lifestyle (62 percent, versus 37 percent among those without TDFs).
Three-quarters of those holding TDF investments said they were somewhat or very knowledgeable about financial products and investments, while only 42 percent of the non-TDF-owning public said the same thing.
"It is estimated that 80 percent of DC assets will be held in TDFs by 2020," added Alison Salka, corporate vice president and director LIMRA Research. "TDFs offer the advantages of simplicity and diversification; consumers who understand how these work are going to be more comfortable with their investments and more confident about their retirement prospects."
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