AllianceBernstein’s “In the minds of participants” study found many misconceptions about target date funds.
Regardless of whether participants invest in TDFs or not, most lack a basic understanding of how these funds work, according to the survey. Across all plan participants, less than 40% have a clear idea of what the date in the name of a TDF means.
The survey revealed that misunderstandings increased over time. For example, in 2015, 36% of TDF investors mistakenly believed the funds were FDIC insured. In the 2021 survey, 68% mistakenly believe so.
Fifty-seven percent of TDF investors who responded to the survey said they believed TDFs were 100% invested in cash upon retirement. Meanwhile, half believe the funds guarantee a person will meet their retirement income needs, and 42% said they believe the amounts in the funds are guaranteed never to drop.
AllianceBernstein asked participants who believe the funds include guarantees why they believe so. Almost a quarter (24%) said the fund documents say they are guaranteed, 35% said they believe the year in the fund’s name means it is guaranteed to be enough funded that year, and 21% said a representative said the funds were secured.
“We know that’s not true; it’s the perceptions of the participants,” says Jennifer DeLong, defined contribution manager at AllianceBernstein.
Megan Yost, senior vice president, engagement strategist at Segal Benz, says AllianceBernstein’s research is consistent with other surveys – research finding participants invest in more than one TDF shows they don’t understand how the funds work.
Many TDF investors default to these funds and take a hands-off approach to their retirement savings. Yet having misperceptions about funds can give members a false sense of security about progressing their retirement savings or preparing for retirement.
Defaulting into asset allocation vehicles, such as target date funds, is a good thing because when participants are their own portfolio managers, many have been misallocated, DeLong says. “In an ideal world, they would have a better understanding of TDFs, but a lot of people aren’t comfortable with investing,” she adds. “It’s important to continue educating plan members so they don’t get the wrong idea about their retirement readiness.
After the financial impact of the pandemic and now with market volatility, plan members are thinking more about their financial security, so now is a great time for plan sponsors to increase their education.
Given that many plan members default to TDFs, it shouldn’t be surprising that they don’t understand all the funds, DeLong says, but plan sponsors shouldn’t be discouraged by the lack of knowledge, because those participants always have more appropriate asset allocations. “Many plan members understand TDFs, but plan sponsors have an opportunity to do more education, especially with the events of the past two years preparing plan members to do more planning,” she says.
Educate on TDFs
Heather Balley, director of participant communications at AllianceBernstein, says the lack of knowledge among participants is not specific to TDFs but to finance in general. “It’s important for individuals to understand their overall finances and where they’re invested,” she says.
Yost agrees. “What we know about financial literacy is that it is built over time. That’s why it’s important to keep educating and reinforcing basic knowledge year after year,” says Yost. “Hopefully this strategy will help clear up some of these [TDF] misunderstandings. »
Balley says that when AllianceBernstein works with clients, they first hold a strategy session about what content will be delivered and through what mediums. “Education shouldn’t just be included in the benefits manual or fund prospectuses, but maybe there should be a video to explain what a TDF is,” she says.
Balley adds that information should be provided in easy-to-understand language. Some terms are obvious to those working in the pension industry, but not to laypersons. These should be defined and used consistently, and pictures and images can also be used, she suggests.
Yost suggests that plan sponsors and advisors provide fun information because much of the investment communication is complex and uses legalese. “Plan sponsors and advisors should think about what they can do in fun ways to improve understanding, especially if a large portion of the participating population is in TDFs,” she says. “They can share videos and do fun quizzes to help clear up misunderstandings.”
Yost adds that examples are always helpful. “If looking at a [TDF] vintage, examples can help those of that vintage conceptually understand how TDFs work,” she says. She also suggests using analogies. For example, how an airplane reaches its target depending on whether it has a longer or shorter runway. “Try to make the connection to everyday life for people who don’t think about it every day,” she says.
Yost also suggests using a birth date chart to explain in a different way than the retirement date which target date year is appropriate for a person’s age.
Yost says that many archivists have a wealth of material on TDFs, so plan sponsors and advisors can start by talking to archivists about the resources available to them. “The material may need to be changed to match the plan, but you can still provide education overview not to mention specific funds,” she says. “Ask vendors for ready-to-use videos, interactive brochures, and content on their website about TDFs.”
Additionally, if a plan sponsor partners with another provider for communications (perhaps for annual enrollment), they can see what resources those providers might have on pension plans and TDFs, Yost says.
Plan sponsors can also turn to their advisors to help educate members about TDFs. “Financial wellness is a hot topic right now, and plan sponsors have turned to pension plan providers to improve general financial information. If there is information about TDFs on these platforms, ask if it can be shared with participants,” she says. “Also make sure participants are clear about where they can go for individual, unbiased advice, if that’s part of the offer.”
Balley notes that AllianceBernstein’s research found different investment personality types, and plan sponsors should try to target education based on that. “Typically, participants are grouped by generation, but we don’t subscribe to that,” she says. “There could be a very tech-savvy baby boomer or a young entrant who doesn’t even have a computer or WiFi.”
Just as sites like Amazon can send personalized suggestions based on previous views, the retirement industry is about to have such personalized communication, Balley argues. The three investment personality types were “able” confident investors, “willing” young and unaware participants, and “conservative” cautious savers. “If plan sponsors can tailor messages to these groups, they can turn the tide to improve engagement,” she says.
With more talk about providing a lifetime income to participants in defined contribution plans and efforts by legislators and regulators to do so, there may soon be more safeguards in participants’ investments. “If plan sponsors are moving towards offering guaranteed retirement income investments/annuities, this could be a good opportunity to educate members on the difference between these guaranteed funds and TDFs,” says DeLong.
