It’s a well-known and perhaps sad fact that most investors in a fund have lower returns than the actual fund. How does that happen? In times of market volatility, investors get nervous selling when the fund is low and then missing out when it bounces back. Managing Director Matthew Soifer at BlackRock, which manages over $4 trillion, explains how target date funds (TDFs) can help better manage participant behavior through market gyrations but also through their entire investing careers.
Though older workers might have larger account balances, younger investors have the great advantage of time – by saving early, they have the opportunity to build up a sizeable nest egg and create good savings habits. TDFs not only try to mitigate market, inflation and longevity risk, they help manage behavior risk. People are more sensitive to losses than they are to gains which can cause unfortunate behavior causing them to lose out. By investing in TDFs which focus on long time horizons v. short term returns like individual investments, people are less likely to move in and out of TDFs.
Though returns and income are not guaranteed, TDFs strive to replace income rather than just rates of returns which is why the demographics of a company are key to selecting the right TDF. HR professionals are in the best position to understand the behaviors and risk aversion of their employee base and become key stakeholders when selecting the right TDF for their workforce.
So why do so many companies select the proprietary TDF offered by their record keeper? Is it a coincidence that the prop funds meet the company’s needs? That’s a question being asked by many larger plans now moving away from their record keeper’s TDF doing separate analysis on which provider is best for each service. Many are going to customized TDFs not just to make sure that the fit is right but also to save money.
It’s impossible to teach all employees how to optimize their investment portfolio so better for the vast majority of the population to offload that role to a professional like a TDF provider to better manage participant behavior.
