While regulators have focused on target-date funds since the financial crisis, most investors understand the funds’ basic design and are aware of their risks, a Vanguard survey of 4,700 investors shows.
Investors in IRA accounts tended to know more about target-date funds than 401(k) participants, probably due to the higher level of engagement needed to manage an IRA, Vanguard aid.
Some 95% of TDF investors in IRA accounts said they have heard of a target-date fund, compared to 62% of investors in defined contribution retirement plans.
“It is encouraging that many plan participants are aware of target-date funds,” said John Ameriks, head of Vanguard investment counseling and research. “Participants who are not aware of TDFs are likely to be unengaged investors—and these funds are intended to provide such investors with a prudently diversified portfolio. The existence of a sizable ‘unaware’ group of investors is perhaps the major reason why target-date funds were created in the first place.”
Among those investors aware of TDFs, they understood the fundamental goal and design of the funds, including that they involve risk and offer no guarantees.
Seventy-seven percent knew that the asset allocation becomes more conservative as the target year approaches, and 68% were aware that target-date funds offer a diversified mix of stocks and bonds. Eighty-seven recognized that TDFs involve some risk; only 1% thought they were risk-free.
And a large majority, 61%, said they chose a target-date fund because they wanted a balanced fund that provides simplicity and convenience.
However, 8% incorrectly believed that TDFs provide guaranteed income. And while most target-date funds continue to change their asset allocation for a number of years past the target year, only 24% were aware of that.