Participants' reluctance to allocate all of their 401(k) assets into target date and target risk funds signals a communication problem, according to Invesco's bi-annual analysis of the defined contribution market.
The report cites Aon Hewitt's research showing 68 percent of plan participants have money invested in the qualified default investment alternatives.
But the average allocation is only 69 percent of assets, indicating to both Aon and Invesco's analysis that participants are combining TDFs and target risk funds with other investment options.
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"Target date and target risk options are intended to be 'one stop' diversified portfolios, but many participants are apparently not getting that message," wrote Greg Jenkins, senior director of Invesco's Defined Contribution Institute.
Invesco runs five proprietary target date funds and three target risk funds. The publicly traded money manager reported $776.4 billion in assets under management, a 3.8 percent month over month decrease, in its latest earnings report issued earlier in September.
Jenkins wrote that participants both misunderstand the use of the so-called "life cycle" funds, and that they likely adjust allocations relative to their comfort level with them.
Invesco's research has identified two core problems with investors' perceptions of the funds.
For starters, investors have a deep-rooted aversion to putting all of their eggs in one basket, said Jenkins.
"In our studies, investors routinely reacted negatively to the concept of investing 100 percent of their assets in a single fund or strategy," wrote Jenkins. "Diversification is a concept that workers seem to appreciate, and investing in only one option appears to go against that."
Beyond that, Invesco's research has also disclosed a "significant language problem," according to Jenkins.
The bottom line: participants simply aren't as clear as what target date and target risk mean.
When investors were asked whether they would invest their entire portfolio in a target date fund, they overwhelmingly responded no—76 percent said they would not.
But when the concept of target date was further explained, the likelihood of committing all assets to TDFs greatly increased.
When Invesco asked whether they would commit all of their account assets to a "comprehensive diversification strategy that maximizes potential for growth while adjusting for the appropriate level of risk as your needs change over time," 63 percent of survey respondents said they would invest all of their retirement assets in such a strategy.
Sponsors and providers need to rid themselves of the presumption that participants know what target date means, says Jenkins.
For companies like Invesco that are invested in comprehensive allocation to life cycle funds, the solution rests in communication.
"Targeted communications can be an effective tool to help address these prevalent misunderstandings about a potentially effective strategy for retirement savings," said Jenkins.
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