As the target-date fund industry works to raise its standing with investors, a recent Vanguard survey finds that much of that work might already be done.

The study, "Investor Comprehension and Usage of Target-Date Funds: 2010 Survey," found that most investors understand the basic design elements of the instruments. They also are aware of their attendant investment risks.

In January, Vanguard polled a total of 4,700 IRAs holders and participants in employer-sponsored retirement. Some 80% of IRA holders and 68% of plan participants said target-date funds have a diversified mix of stocks and bonds. Also, 93% of IRA respondents and 77% of plan participants said the asset allocation in the funds becomes more conservative over time.

As for what happens after the target year, 63% of IRA holders and 41% of plan participants knew that they could keep investing in the fund beyond that year.

Less than 1% of plan participants thought that target-date funds were risk-free. Just 2% of IRA holders and 4% of plan participants thought TDFs offer guaranteed returns.

John Ameriks, head of Vanguard Investment Counseling & Research, who oversaw the study, says the findings offer encouraging signs that “U.S. investors are not the lumps they are often made out to be.”

Vanguard acknowledged that investors have a lot more to learn about the products. In one finding, 29% of IRA holders and 24% of plan participants knew that asset allocations can change after the target year.

The survey sample probably reflects the knowledge of more self-sufficient investors, given Vanguard’s target audience and low-cost approach to offering investment products, according to John Carl, president of Retirement Learning Center, a New York City-based educational and consulting group. 

“I’ve seen more plan sponsors getting feedback from participants that they do not understand investing in general and want something beyond education,” Carl said. “They want explicit advice.”

Yet the study does present opportunities for financial planners and advisers, Carl said. “The fact that they are aware of the basics does not get anywhere near whether the investment is suitable,” he said.

Carl said the Center is seeing more situations where plan sponsors — including those that use Vanguard products — are engaging with independent advisers to give employees more attentive advice about using target-date funds.

At Vanguard, Ameriks said the company is not trying to replace the role of a financial adviser, but for a lot of investors, using target-date funds offers a sound starting point for retirement planning.

Mitchell is a senior editor at Financial Planning, a SourceMedia publication.

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