Target-date and target-risk funds are being misused by defined contribution plan participants “who may be unaware of the funds' intended purpose” or who might be “uncomfortable with the risk level” of the fund, said a report on investing behavior published Thursday by Aon Hewitt.
“While these pre-mixed funds remain a favored choice for investments, few participants are using them as intended,” said the report based on a survey of Aon Hewitt record-keeping clients. Although 68% of participants have money invested in pre-mixed portfolios, “the average allocation to the funds is only 69%.”
That means participants are investing in other funds, even though the pre-mixed funds are “designed to be all-in investments,” Robert Austin, director of retirement research, said in an interview. The number of investments held by participants in addition to these funds “can be all over the map,” ranging from a single investment, such as a bond fund, to multiple investments, to company stock, Mr. Austin added.
Among the survey's other results, Aon Hewitt found:
- The average participation for all plans inched up to 79% last year vs. 78% for both 2013 and 2012. The average participation rate for plans with automatic enrollment was 86% last year vs. 61% for plans without automatic enrollment.
- The average savings rate rose to 7.6% of pay last year vs. 7.5% in 2013.
- The average plan balance climbed to $100,320, up 10.2% from 2013. The gain was due to higher average savings rates and market appreciation, the report said.
The Aon Hewitt report is based on record-keeping data from 138 clients — mostly 401(k) plans — with combined assets of $250 billion, representing 3.5 million participants. The firm conducts an annual survey of investing behavior.