By Cyril Tuohy
A new survey by Voya Financial finds that defined contribution plan participants investing in target date funds (TDF) feel more confident about their financial future and their ability to meet their retirement goals compared to workers who don’t use target date funds.
TDFs automatically move assets into investments that are generally safer but also yield lower returns as a worker ages.
The survey, titled “Participant Preferences in Target Date Funds: An Update,” found that 56 percent of TDF investors felt they would meet their retirement goals compared to 41 percent of plan participants who don’t invest in target date funds.
“These findings about how target date funds are influencing plan participants’ feelings and savings habits provide some powerful insights that both consultants and plan sponsors can act upon,” said Bas NieuweWeme, managing director and head of institutional distribution for ING U.S. Investment Management, part of Voya Financial.
Recently, mutual fund companies have offered more TDFs for employers sponsoring retirement plans such as the 401(k) for private companies, the 403(b) for nonprofits and the 457 plan for government employees.
TDFs, also known as funds of funds, or mutual funds which invest in other mutual funds, are designed to relieve workers of having to worry about rebalancing their portfolios in search of the right mix if one asset class outperforms another.
A worker who expects to retire in the next five years might choose a fund with 80 percent in bonds and 20 percent in stocks. A worker who has just entered the workforce and has 40 years before retirement might choose a fund with 95 percent of the assets held in stocks and the remaining 5 percent in bonds.
Employees contribute to the plans through a payroll deduction on a pretax basis. Workers often have a choice among six or seven target-date funds.
Critics say TDFs don’t contain a fund family’s best-performing funds, and that the funds are often underused.
TDF investors also contribute more to their employer-sponsored retirement plan compared to investors who do not participate in target-date funds, Voya Financial said.
The survey found that 42 percent of TDF investors contribute more than 11 percent of pretax income to their workplace plan. Only 23 percent of workers who do not invest TDFs were contributing more than 11 percent of their income, the survey found.
Many employees who are automatically enrolled in their company-sponsored retirement plans, either because they are just starting out or because they know nothing about or don’t care for investing, are invested in TDFs by default.
The survey was conducted online last September with 1,017 employer-sponsored retirement plan participants.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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