Target Date Funds (TDF) are meant to be an all in investment using a well-diversified and balanced portfolio of investments that change as people get closer to retirement. Yet, according to 2015 research from Voya Investments, only 15% of TDF investors use them properly by putting all their money in that investment, down from 16% in 2013.
Given multiple choices on why they decided to supplement their TDF choice, the results were:
- 46% wanted to diversify
- 28% wanted to more aggressive
- 28% wanted to customize
- 26% wanted to be more conservative
Some early provider pioneers in the use of professionally managed investments like TDFs actually forced participants to make a choice: either put all money in a TDF or don’t use them at all. Perhaps less intrusive is the use of choice architecture. First ask investors whether they want a third party professional to manage their money. If yes, then all the money goes into that fund. If no, they have to select from the menu of individual investments.
Experts note that participants that augment TDF with other funds have poorer outcomes and may be taking on unnecessary risk. Younger workers seem to be more comfortable and perhaps more knowledgeable about TDFs and are more likely to use them properly. Like with the selection of TDFs, the use of them is much different that with individual investments.
At some point, we might even match a participant’s financial situation with a customized portfolio taking into account not just their age but also their salaries, account balances, deferral rates and outside resources like a DB plan or personal assets. This data can be used to create the right portfolio based on the risk they need to take to replace the desired retirement income. DB plans use what is known as LDI (liability driven investing) – if the plan is well funded, why take risk? If not, then more risk is taken.
But even with this type of customization there are bound to be people that want to tinker – hopefully fewer and fewer as they become more knowledgeable and engaged.
