Workplace retirement plan investors who use target-date funds feel more secure about reaching their goals and managing their portfolios than those who did not, a recent study from ING finds. Nearly three-quarters of target-date investors indicate that these funds made them feel more confident that they were making the appropriate investment decisions.
Rick Unser, ERISA risk management consultant for Lockton, says that the real appeal of target-date funds is that based on your age, the fund has a different allocation toward risks at various intervals.
In the study, led by ING Investment Management U.S. and the ING Retirement Research Institute, respondents show a strong preference for those that are managed by multiple investment managers and are able to provide a guaranteed income at the time of retirement.
More than 90% of target-date investors and 71% of those who did not use them would want a target-date fund that provides stronger protection against market losses in the years leading up to and including retirement. Additionally, 80% of respondents using these funds and 66% of those not using them would prefer less market risk at that stage of the investment cycle.
Other key findings of the study include:
— 88% of target-date investors are interested in a target-date fund that offers guaranteed income at retirement.
— 86% of target-date investors feel confident they know the definition of "diversification," compared to 71% of those who do not use target-date funds.
— 61% of target-date investors prefer multi-manager strategies, while 14% prefer a single manager.
Target-date funds have increased in popularity significantly in recent years, due in part to the Pension Protection Act of 2006, says Unser. They sparked curiosity from most investors, as there were only a few fund families offering them at the time and they were not widely utilized in retirement plans.
“With that safe harbor status that the funds are given, the floodgates [have] opened up for target date funds,” Unser says. “We went from a few fund families offering [these] to now more than 50 target-date sponsors in the marketplace.”
Target-date funds provide investors with automatic asset allocation over time through the convenience of a single age- and risk-appropriate investment. With a simplified approach to investing, target-date funds have become increasingly popular among employers that sponsor retirement plans and their participants. Industry data shows that target-date assets have grown from $15 billion in 2002 to $363 billion in 2011.
The target-date funds are becoming more popular among younger participants in the workplace as well, says Unser.
“As we see a new generation of investors, they’re really the first generation coming into this where target-date funds have been a part of their lexicon from the beginning,” he says. “[Younger investors] are certainly becoming more comfortable with the concept just from a marketing strategy.”
Unser adds that most of the decisions being made around investing are going to be psychologically based, “rather than through an absolute analysis of the performance of the funds, it’s going to be more based on the simplicity,” he says. “The way that benefits professionals and the industry [in general] have presented target-date funds has helped investors come to that conclusion a lot easier by starting out with this type [and] as [participants] age they can change the plan to a customized strategy.”
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