As the target-date fund industry works to raise its standing with investors, a recent Vanguard survey has found that much of the job may already be done.
The research, "Investor Comprehension and Usage of Target-Date Funds: 2010 Survey," was released Jan. 12 and found that most investors understand basic design elements of the investment instruments. They also are aware of their attendant investment risks. Vanguard queried 4,700 investors in January for the research.
It drew responses from investors who owned individual retirement accounts and those who participated in workplace-sponsored retirement plans and presented the results separately. About 80% of the IRA respondents and 68% of the plan participants said target-date funds diversify stock and bond holdings. Also, 93% of IRA respondents and 77% of plan participants said the funds' asset allocations become more conservative over time.
As for what happens after the target year, 63% of IRA holders and 41% of plan participants knew that they could keep investing in their fund beyond that year.
Fewer than 1% of workplace-sponsored-plan participants thought that target-date funds were risk-free. And just 2% of IRA holders and 4% of plan participants thought the vehicles offer guaranteed returns.
John Ameriks, the head of Vanguard's investment counseling and research unit, who oversaw the study, said that its findings offered encouraging signs. "U.S. investors are not the lumps they are often made out to be," he said.
Vanguard acknowledged that investors have a lot more to learn about the products. In one finding, only 29% of IRA holders and 24% of plan participants knew that target-date funds' asset allocations could keep changing after the target year. As Vanguard reiterates in the study, most such funds continue to change asset allocations for years past the target year.
The survey sample probably reflected the knowledge of more self-sufficient investors, given Vanguard's target audience and low-cost approach to offering investment products, John Carl, the president of Retirement Learning Center, a New York educational and consulting group, said in a telephone interview on Jan. 12.
"I've seen more plan sponsors getting feedback from participants that they do not understand investing in general and want something beyond education," Carl said. "They want explicit advice."
Yet the research did present opportunities for financial planners and other independent advisers, Carl said. "The fact that they are aware of the basics does not get anywhere near whether the investment is suitable," he said.
Carl said the center is seeing more situations in which plan sponsors — including those that use Vanguard products — are engaging with independent advisers to give employees more attentive advice about target-date funds.
At Vanguard, Ameriks said, the company is not trying to fill the financial adviser role, but for a lot of investors, target-date funds offer a sound starting point for retirement planning.
