Have Target-Date Funds Lost Their Allure?

A recent article in Pensions & Investments discussed a fund company survey that suggested defined contribution (DC) plan participants aren’t happy with their target-date funds. The survey found that only 22% of participants were “very satisfied” with their target-date investment. The fund company—which isn’t a target-date fund provider—called that “pretty darn low.”

But the survey also found that another 57% of respondents were “somewhat satisfied”—hardly a condemnation, in our view. Altogether, 79% of respondents had a positive view of target-date funds. That seems pretty darn good to us. 

In our own recent survey of DC plan participants, we posed a similar question to respondents: “How satisfied are you with target-date fund investment performance in comparison to other funds offered within your plan?” More than 81% of respondents said they were either more satisfied or equally satisfied with target-date performance (Display ). How many were less satisfied? A mere six percent. (The others either were not satisfied with any investments or said they didn’t know.) We think that this is an objective way to frame the question, since it probes respondents’ satisfaction relative to other options available to them. Target-Date Fund Satisfaction Levels Are High What’s more, the percentage of respondents who said they were equally or more satisfied has grown to 81% from 62% in our 2009 survey, which was conducted at the very bottom of the market decline. This suggests that target-date funds are hardly losing their appeal.

The Employee Benefit Research Institute (EBRI)—an independent, nonprofit and nonpartisan organization that studies employee health and retirement security programs—corroborated our findings on the continued appeal of target-date funds in their August Issue Brief . EBRI found that among participants who had all of their account allocated to target-date funds in 2007, a very strong 83% stayed with that full allocation in 2009, through the most turbulent market environment in recent history.

Other findings of our survey indicate a growing appeal and use of target-date funds.

First, target-date fund usage is at its overall highest since we performed our first annual participant survey in 2005. Second, target-date users have been increasing their allocations to target-date funds. The share of target-date users allocating at least 40% of their DC plan assets to these funds has jumped from 44% in 2007 to 58% in 2011. Again, pretty darn good.

We will publish the complete results of our annual survey, “Inside the Minds of Plan Participants, 2011,” later this fall. We’ll share more of our survey findings in the coming months.

This blog contains links to third-party websites. AllianceBernstein is not responsible for and does not endorse the content on those sites. “Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested¾including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York

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