Industry News

TDFS AND WHAT EMPLOYEES DON'T KNOW

In the July issue of IOMA's Managing 401(k) Plans, the cover article reports on a survey conducted by Behavioral Research Associates. 63% of the people surveyed incorrectly described Target Date Funds. Here is a sample: "investments that are supposed to have maximum pay out at a certain date; a fund set up with a predetermined amount you think you can live on when you retire and a date to reach that goal; funds that will be made available for release for use on a specified date, and a financial instrument that matures 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." 38% thought investing in TDFs meant they would earn a guaranteed return. Almost 25% thought there was little to no chance of losing money either before or after retirement. 70% thought they were equally or less likely to lose money than in a money market fund. 42% thought the risks of all TD 2010 funds would be very similar or extremely similar; 46% thought they would be slightly similar and only 12% said they would not be similar. The article went on to say that plan sponsors need to know that although there is a huge amount of money invested in TDFs, they are not all alike, and the "glide path" is different for different funds. In other words, is the fund designed just to get the participant up to a retirement date anticipating that they will withdraw their assets at retirement or up to and all through a retirement period that could be another 30 years for some. For example, the Wells Fargo 2010 TDF may have as little as 20% invested in equities whereas T Rowe Price has around 55%. Fees can vary widely and detract from fund performance. The article closed by saying that plan sponsors need to ask their TDF manager how they determine the asset allocation over the lifecycle, how do they select and monitor the underlying investments, and how are the related risks communicated to participants?

(Sources: Managing 401(k) Plans and FCM)

Updated 8/15/10