October 29, 2012
--- Many participants have
an incorrect view about what they will get from a target-date fund (TDF). ---
Although participants report being satisfied with their TDF
default investment option, a large number assume the TDF will provide lifetime
income, which is “overwhelmingly not the case,” Seth Masters, chief information
officer at AllianceBernstein, told PLANADVISER.
Lifetime income is, by a wide margin, the top thing
participants want in a retirement plan, Masters said during a recent
AllianceBernstein retirement forum. The irony is that whenever participants are
given the chance to add an annuity, however, research shows that virtually none
of them do.
Participants shy away from “traditional annuities” because
they spur feelings of a loss of control, as well as the fear of insurance
companies benefiting from a participant’s unpredictable lifespan. “The idea of
losing that control is psychologically, unbelievably difficult for most people
to agree to,” Masters said.
As a result, the lifetime income adoption rate is minimal if
not made the default, Masters said, so the best solution is to marry the
lifetime income solution with the TDF default.
Plan Sponsors Not Fully
Plan sponsors are also satisfied with TDFs,
but AllianceBernstein’s third biannual survey of plan sponsors found only about
half of plans have made TDFs their default option. “That was a real shocker to
us,” Masters said.
Of the 50% of sponsors offering a TDF but not
using it as the default, 83% have no default or are still using a stable value
fund, an equity fund or a bond fund—none of which are qualified default
investment alternatives (QDIAs)—as the default (see “Plan Sponsors Not Making Best
Use of TDFs”).