Promises They Can't Keep: Misconceptions about Target-date Funds

May 5, 2009 ( - A recent survey from Envestnet Asset Management revealed individuals have trouble understanding target-date funds.

Only 16% of survey respondents said they had heard of target-date funds prior to the survey, and 63% of those incorrectly described them.

After reading a composite description of target-date funds, respondents said the funds offered the following promises:

  • Nearly 62% of respondents thought they would be able to retire on the fund’s target date;
  • 62% said they could spend less time tracking their progress toward retirement goals;
  • Almost half (48.6%) said they could stop worrying about investment and savings decisions and leave everything up to a professional;
  • Roughly 38% of respondents believe the funds will produce a guaranteed return;
  • More than one-third (35.5%) of respondents believe their money will grow faster in target-date funds than in other investments; and
  • Almost 30% believe they can save less money with the funds and still meet their retirement goals.

Respondents also had little sense of the risks of investing in target-date funds:

  • 41% think there is little or no risk of losing money in a one-year period, and 57% believe it is unlikely that they can lose money in any 10-year period;
  • One-fifth of respondents believe it is less likely they could lose money in target-date funds than in money market funds, while 50% believe the odds were equal;
  • 28% thought they were less likely to lose money in target-date funds than in equity mutual funds, while 52% thought the odds were the same; and
  • 38% of respondents thought the risk levels in funds with the same target date would be very similar.

When asked to choose from a list of seven potential target-date portfolios, the majority of respondents selected the most aggressive fund, based on expected returns over a 10-year period. Only 8% of respondents said selecting a retirement savings rate was the most important retirement planning decision they could make.

Envestnet surveyed 251 individuals ages 25 – 70 employed now or in the past year.