Workers Might Have Wrong Idea about Target-Date Funds

A recent study found that workers have misconceptions about target-date funds.

It is no secret that target-date funds were created for those that didn’t want to understand investing. However, a recent study by Envestnet suggests that workers might have large misunderstandings about target-date funds—such as that target-date funds are guaranteed.

Only 16% of participants surveyed by Envestnet said they had heard of target-date funds prior to reading the description, and 63% of that group incorrectly described them, according to the study. A couple of definitions included: “funds that will be made available for release for use on a specified date;” and “a [financial] instrument which is due for maturity at a set date in the future, by which date the amounts invested in the instrument are planned to have accumulated a certain amount gain.’

About half of the respondents said they are neither likely nor unlikely to invest in target-date fund, and 21% said they are likely to.

Target-Date Promises

About 40% of respondents somewhat or strongly agree that investing in target-date funds means that they will earn a guaranteed return. Furthermore, 23% of respondents agree somewhat or strongly that there is little or no chance of losing money before the target-date. About the same number feel the same about losing money after the target-date.

Almost half agreed that investing in a target-date fund means they “can stop worrying about investment and savings decisions and leave everything up to an investment professional.” And almost 30% agree target-date funds mean they can save less money and still meet their retirement goals.

When it comes to the risk of investing in target-date funds, respondents tended not to see a huge difference among fund companies. Respondents said the risk levels of funds with the same target date are slightly similar (46%) or very similar (38%). When compared to investing in stock mutual funds, more than half (52%) of respondents said they are equally likely to lose money in target-date funds in a one-year period; 28% feel they are less likely.

When asked what task is most important when investing in target-date funds, about 28% say it is “picking the right retirement date.” The second largest percentage chose asset allocation as a priority (26.7%); followed by choosing funds with the best historical returns (22.3%); and picking the fund with the lowest expenses (15.1%). The last on the list—cited by only 8% of people as a first priority—was “selecting a savings rate.”

Envestnet surveyed 251 individuals aged 25 to 70 and employed now or in the past year.