Research Shows Workers’ Poor Grasp of Target-Date Funds

Plan sponsors may need to bolster participant education for how target-date funds work, according to data from MFS.

Workers lack sufficient knowledge of 401(k) plan target-date funds, MFS Investment Management data shows.

The MFS Retirement Outlook 2023 survey found gaps between workers’ understanding of how target-date funds work and how they actually function, revealing fundamental misunderstandings that require participant education. These misunderstandings can have implications for saving, investing and living in retirement, explained Jon Barry, head of client solutions for the investment services group at MFS.

“Although target-date funds are firmly established in defined contribution menus, questions persist as to whether they can solve the retirement income puzzle,” according to Barry’s brief accompanying the survey results.

The survey asked U.S. respondents already invested in TDFs to indicate the extent to which they agreed with various statements.

The survey showed workers had a solid understanding for some features—78% understood target-date funds get more conservative by de-risking allocation, from equities to bonds, as workers get closer to retirement and 82% said target-date funds are a good way to diversify with one investment—yet 75% said target-date funds provided a guaranteed income stream in retirement, 68%, the investments provided a guaranteed rate of return and 63% believed target-dates invested entirely in cash or other low risk investments in retirement.

Target-date funds are offered by 80% of all plan sponsors, according to the PLANSPONSOR 2022 DC Plan Benchmarking survey. Target-date funds are the dominant investment vehicle for workers with a defined contribution retirement benefit—with 31% of all assets, an Employee Benefit Research Institute research brief shows and 61% of new contributions.

In the survey, Baby Boomers and Generation X respondents viewed TDFs differently, particularly as an investment option in retirement.

MFS found that 42% of Baby Boomers anticipate consulting an adviser to determine how to adjust their investments upon retirement, compared with only 25% of Gen X workers, who are slightly more likely (19% to 14%) to keep all assets in a TDF.

As for how TDFs fared last year, MFS data indicated that a TDF allocating 70% to equity and 30% to bonds experienced a 13.2% decrease year-to-date return through November 30, 2022, while one allocating 70% to bonds and 30% to equity decreased 10.7%, because “2022 was a difficult year for many TDFs, and with negative returns for many near-retirement vintages, investors who thought of these funds as safe investments may have gotten an unpleasant surprise,” Barry wrote.

    The U.S. results published in the 2023 survey were from the MFS 2022 Global Retirement Survey. The 2022 MFS Global Retirement Survey gathered insights from approximately 4,000 retirement savers across Australia, Canada, the U.K. and the U.S. Data referenced in the 2023 survey represent responses from 1,001 U.S. respondents.

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