So says Nathan Voris, large market practice leader for Morningstar Investment Management in Chicago. Similar to the shift from defined benefit (DB) to defined contribution (DC) plans, many in the retirement industry have been moving from target-risk to target-date funds (TDFs). This reflects the trend toward automation as an answer to participant inertia, but are plan sponsors moving in the right direction?

According to PLANSPONSOR’s 2014 DC Survey, target-date funds are available in 69.8% of plans—generally growing in popularity from the micro- to the mega-sized market—while target-risk funds are in pace at just 39.5%—generally falling in favor from smaller to larger plans. Approximately one in four plans offers both types of funds. Interestingly, balanced funds have the highest availability among plans of all sizes, in place at 73.1% of plans overall.

When it comes to participant understanding, Voris says, “With target-date funds, you need to know what a target-date fund is and be familiar with what you’re invested in. In contrast, if you look at a series of risk-based models, there’s a lot more work to do.” (See “A New Proposal for Monitoring TDFs.”)

Determining participants’ risk tolerance requires many more variables than just their birth date, and individual preferences are likely to change over time—without the participant updating his retirement profile. With risk-based funds, “the assumption is that individual is responsible enough to know he needs to come back and take the [risk-capacity] questionnaire periodically throughout his career.”

For most participants, that level of engagement with the plan is unlikely, and plan sponsors run the risk of having the decisions of a recent post-grad affect the investments of a pre-retiree. “A 25-year old, who may have a long time horizon and be willing to take on more risk, may be in an aggressive portfolio his entire career because he hasn’t come back into the plan; as his risk appetite and time horizon changes, his portfolio doesn’t change along with him.”

As engaged plan sponsors contemplate the challenges of getting the right investment lineup in place, some large and mega plans suggest a simpler approach will help participants perform better.

“What we see less and less of is a plan offering a series of target-date funds as well as a series of risk-based models, conservative to aggressive,” Voris explains. At plans that still have both in place, which account for roughly 25% of respondents to the 2014 PLANSPONSOR DC Survey, the risk-based funds are often a legacy from before the qualified default investment alternative (QDIA) safe harbor was established.

“If a company does decide to add target-date funds to its retirement plan offering, there is certainly going to be a pull to keep those existing risk-based options in the plan. You never want to see plan changes be perceived as a takeaway,” Voris notes. Maintaining a target-risk approach is often the result of a more cultural or corporate decision than an investment one, he adds.

Still, “in the large and mega market, having one risk-based model—maybe a balanced fund—along with a series of target-date funds [remains] relatively common. You see that structure if a balanced fund has been in the plan a long time, even if it has adopted a more modern QDIA,” says Voris. Balanced funds are much more prevalent, he says, and may serve an important purpose in a core menu.

“There are a few hybrid or matrix models, if you will. You might have three risk series—conservative, moderate, aggressive—and then there’s also a time horizon component.” However, Voris adds, “even in those hybrid structures, the overwhelming majority of participants either utilize the default, whatever that would be, or, if they are going through the exercise [to determine their risk preference], they’re nearly all in that moderate glide path.”

In plans where the hybrid option is not available, particularly in the larger end of the market, “You’ll still see a balanced fund, and often it is one of the most-utilized options beyond the QDIA.” All of this suggests that, when participants make active (or even passive) decisions about their investments, they prefer a moderate, or balanced, portfolio. This likely holds true at any age.

The reason for this phenomenon is uncertain. Plan participants are often their own worst enemy, so it may come as a surprise that many favor a course of action that would serve them well both during their career and throughout retirement. But perhaps it all comes down to participants’ lack of financial literacy—a balanced approach certainly sounds appealing, whether one is a new investor (who may not understand what “conservative vs. aggressive” really means) or approaching retirement—facing upwards of 30 years of living off investments.

According to Brian O’Keefe, director of research and surveys for PLANSPONSOR, “Overall, there’s some debate in the industry going on about how much equity exposure retirees should have. Some argue that, since retirees must live for 20-plus years in retirement, the glide path should have more equity exposure or increasing equity exposure during retirement. In many ways, a traditional balanced fund is probably the best solution, versus a more complicated target-date fund, but that’s for the plan sponsor to decide.”

For fiduciaries, who must be held accountable for the plan’s investments, a balanced fund is often perceived as the most defensible position in the target-date/target-risk debate. “[Plan sponsors] have to be aware that risk-based models carry a higher level of burden for the participants. When they’re comparing and contrasting the value of target-date funds vs. managed accounts vs. risk-based models, they really need to be aware and honest with themselves,” Voris says. He suggests asking this question: Are my participants equipped to use a risk-based fund correctly? If yes, sponsors must make sure to provide the education and guidance participants need to get on the right track to retirement readiness.

For plan advisers, who are often named as fiduciaries and must be held accountable for the plan’s investments, a balanced fund may be perceived as the most defensible position in the target-date/target-risk debate as well. But as a consultant to the plan, Voris says, plan advisers need to make sure their plan sponsor clients are aware of the added difficulties of risk-based models. “If they have an opinion that the target-date is superior to the risk-based, or vice versa, they need to make that opinion known.”