Defined contribution plan executives are too focused on “investment metrics” when evaluating target-date funds rather than the role these funds should play in helping participants prepare for retirement, a new survey by Towers Watson & Co. finds.
“Plan sponsors may be coming up short in how they evaluate and select target-date funds,” said a report issued Tuesday outlining excerpts of the Towers Watson survey. “The vast majority of plan sponsors focus on investment metrics and not bigger picture measurements such as retirement success rates and income replacement ratios.”
When DC plan executives were asked about important considerations in their selection of target-date funds, the top choices were glidepath (71%), fees (54%), active vs. passive management (47%) and portfolio construction (47%). Respondents could give more than one answer. Income replacement ratio was cited by 12% and “retirement success rates under drawdown scenarios” was named by 8%.
“We are disappointed but not surprised,” Lorie Latham, a director at Towers Watson, said in an interview. “The entire industry has to reframe how it looks at retirement.”
The large percentages of answers for fees, portfolio construction and active/passive management illustrate DC plan executives are still “myopically focused” on investment factors rather than the longer-term role of target-date funds building a retirement foundation, Ms. Latham said.
The Towers Watson survey — a detailed version will be available in late October — was based on responses in June and July from 457 employers with 401(k) or 403(b) plans that have at least $10 million in assets and more than 1,000 employees. Thirty-seven percent of the plans had assets of $1 billion or more and 23% had assets between $500 million and $999 million.