Participants Have Inaccurate View of TDFs

October 29, 2012 ( – Many participants have an incorrect view about what they will get from a target-date fund (TDF).

By Corie Russell | October 29, 2012
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Although participants report being satisfied with their TDF default investment option, a large number assume the TDF will provide lifetime income, which is “overwhelmingly not the case,” Seth Masters, chief information officer at AllianceBernstein, told PLANSPONSOR.

Lifetime income is, by a wide margin, the top thing participants want in a retirement plan, Masters said during a recent AllianceBernstein retirement forum. The irony is that whenever participants are given the chance to add an annuity, however, research shows that virtually none of them do.

Participants shy away from “traditional annuities” because they spur feelings of a loss of control, as well as the fear of insurance companies benefiting from a participant’s unpredictable lifespan. “The idea of losing that control is psychologically, unbelievably difficult for most people to agree to,” Masters said.

As a result, the lifetime income adoption rate is minimal if not made the default, Masters said, so the best solution is to marry the lifetime income solution with the TDF default.

Plan Sponsors Not Fully Utilizing TDFs 

Plan sponsors are also satisfied with TDFs, but AllianceBernstein’s third biannual survey of plan sponsors found only about half of plans have made TDFs their default option. “That was a real shocker to us,” Masters said.

Of the 50% of sponsors offering a TDF but not using it as the default, 83% have no default or are still using a stable value fund, an equity fund or a bond fund—none of which are qualified default investment alternatives (QDIAs)—as the default (see “Plan Sponsors Not Making Best Use of TDFs”).