Research says many investors are not married to TDFs forever
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October 28, 2019 12:00 AM

Research says many investors are not married to TDFs forever

Robert Steyer
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    Rob Austin
    Robert Tannenbaum
    Robert Austin believes some participants may fear putting all their eggs in one basket.

    As target-date funds continue their march to ubiquity in defined contribution plans, some research shows that certain selling points for these options aren't as strong as promoters suggest.

    Remember the motto that target-date funds, thanks to their professionally managed glidepaths, let participants "set it and forget it?"

    Research by Alight Solutions says participants actually don't stay fully invested very long in target-date funds.

    Forty-nine percent of participants who were fully invested in target-date funds were no longer fully invested after 10 years, said a report based on the analysis of 2.5 million target-date fund investors in plans where Alight is the record keeper. The plans had $87.6 billion in target-date assets as of Jan. 1 and total DC assets of $331 billion.

    Some investors left target-date funds completely, while others remained partially invested. Alight defines "partially invested" as something less than 100% and more than zero. The average partial investment was 40%.

    During that 10-year period tracked by Alight, the number of fully invested participants switching to partial investing outnumbered those quitting target-date funds by a 3-to-1 ratio.

    The results were a surprise because "target-date funds are designed to be your only portfolio" in a retirement account, Robert Austin, the Charlotte, N.C.-based director of research, said in an interview.

    He speculated that some participants may have applied the old saying of "don't put all your eggs in one basket" to target- date funds, believing that they need more diversification. "To those individuals, it looks like one investment," he said.

    The report found that 3% of participants who were fully invested in a target-date series in 2018 put their money in more than one vintage, such as a 2025 fund and a 2040 fund. Among those partially invested, 21% invested in more than one vintage. Two-thirds of the multivintage investors put money in two vintages. The others invested in three or more, including 4% who put their money in nine or more.

    This behavior illustrates participants' misunderstanding of target-date funds. An Alight research report published in May 2019 said 59% of participants responded that they didn't know anything about target-date funds. It also said only 14% answered correctly that target-date funds rebalance allocations over time. Only 11% correctly said a target-date fund is designed to be a participant's sole investment.

    The latest Alight research, published in mid-October, reported that full investing in target-date funds declined by age in 2018.

    For example, 70% of the youngest group (30 and under) was fully invested. That rate declined steadily over four other age groups, culminating with 25% of people 60 years and older being fully invested in target-date funds.

    Mr. Austin said these results aren't surprising. "A lot of younger investors probably have similar investing styles," he said. "As people get older there are a lot of variances" in the economic factors affecting their lives.

    "Target-date funds based on age may be an oversimplification," he said. "Target-date funds are good, but perhaps not a panacea for everyone."

    Alight's research also shows that target-date fund investors contribute less to their accounts than those who don't use them.

    These 2018 results held true when Alight controlled for three different approaches — auto enrollment, quick enrollment or self-enrollment. (Alight defined quick enrollment as a plan feature that allows participants to make a decision whether to make quick contributions online or by mail for a preselected savings rate.)

    In each category, Alight reviewed results of people who were fully invested, partially invested or not invested in target-date funds. The latter group always contributed the most, followed by the partially invested and then the fully invested. For example, among auto-enrolled participants, the average annual contribution rates were 7.6% for non-investors, 7% for partial investors and 5.3% for full investors.


    Default rates

    These results could be due to default rates set by plans' auto-enrollment feature for their qualified default investment alternative, Mr. Austin said. "Three percent is still a common default rate," he said. "It's better than zero, but people on their own will have a higher default."

    Alight found the same trend when it examined five age groups.

    For example, among the youngest (under 30), the average contribution rate for non-target-date investors was 7.7% vs. 7.5% for partial target-date users and 5.6% for full target-date investors. Among the oldest (60-plus), the contribution rates were, respectively, 11%, 10.5% and 7.6%.

    Mr. Austin said he was surprised by results showing that participants in 2018 had lower percentages of full target-date investing when their plans offered more investment options.

    "I would have thought it would be the reverse," said Mr. Austin, noting that participants can be overwhelmed by "choice overload."

    In plans with 25 or more options, only 17% of participants were fully invested in target-date funds.For plans with 16 to 25 options, full target-date use was 39%. The fully invested rate was 49% for plans with 12 to 16 choices and 44% in plans with 12 or fewer options.


    MORE ON TARGET-DATE FUNDS

    Target-date funds fuel healthy growth for DC participants investing in mutual funds. Page 28

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