Few 'very satisfied' with target-date funds, survey finds

Despite the growth in popularity of target-date funds, only 22% of participants say they are very satisfied with the investment, according to new research by Dimensional Fund Advisors.

“We were surprised,” said Timothy Kohn, vice president and head of defined contribution for the Austin, Texas, financial services and consulting firm. “We thought there would be greater receptivity. We found a lot of concerns around performance.”

Based on interviews with 1,000 participants, the firm also found that 57% of respondents were “somewhat satisfied” with target-date funds, while the remainder were dissatisfied or neither satisfied nor dissatisfied.

Excluding participants who were ‘very satisfied,' the survey asked the other respondents the reasons for their response. Forty-nine percent of this group said their target-date fund's rate of return was poor or lower than other investments.

When asked if they would recommend target-date funds to a friend, colleague or family member, 16% of participants said they were unlikely to do so and 43% said they were neutral. Another 32% said they were somewhat likely and 10% said they were very likely, he said. “The receptivity to target-date funds seems pretty darn low,” Mr. Kohn said.

The firm also found what Mr. Kohn said were surprising responses from plan executives, 200 of which were interviewed in a separate survey by Boston Research Group, which also conducted the participant survey.

In the plan sponsor survey, 63% of plan executives said they were either very concerned or somewhat concerned about how target-date fund losses from 2008 would affect participants who were close to retirement. Sixty-one percent said they were “somewhat surprised” or “completely surprised” at the heavy losses experienced by target-date funds in 2008.

Still, only 10% of plan executives said they believed target-date fund losses in 2008 created a fiduciary risk. “That is a little bit disconcerting,” said Mr. Kohn, adding that sponsors appear to be confident that they are protected by safe harbor provisions of the Pension Protection Act.

The survey also found that the plan executives had little or minor concerns over important issues affecting target-date funds. For example:

• When asked about the equity proportion in target-date funds, 45% said they weren't concerned and 37% said they had a minor concern;

• When asked about participants' ability to choose the “appropriate” target-date fund, 55% said they had no concern and 28% said they had a minor concern; and

• When asked whether there was a difficulty in understanding a target-date fund's glidepath, 45% said they were concerned and 41% said they had a minor concern.

The participant survey was conducted online in January with 1,000 DC plan participants. A telephone survey of 200 plan executives also was conducted in January. Most of the plans were 401(k) plans.

Among the sponsors, only 5% had assets of $50 million or more. “We really didn't see a difference in participant behavior across small, medium or large plans,” Mr. Kohn said.