Target-Date Funds: Investors ¡®Get It,¡¯ Says Vanguard Study

Though there’s been much speculation about investors’ understanding of target-date funds, a Vanguard survey released Wednesday finds that most investors in target-date funds understand the funds’ basic design and are aware of the associated investment risks.

In Investor Comprehension and Usage of Target-Date Funds: 2010 Survey, Vanguard also found that opportunities exist to improve investors’ knowledge of target-date fund mechanics at and around the target date.

Vanguard conducted the online survey in January 2010 and had more than 4,700 respondents, including IRA owners and participants in Vanguard-administered defined contribution retirement plans.

Overall awareness of TDFs was substantially higher among IRA owners than among plan participants, with 95% of TDF investors in IRA accounts reported having “heard of a target-date fund,” versus 62% of TDF owners in defined contribution retirement plans.

“It is encouraging that many plan participants are aware of target-date funds,” said John Ameriks, Ph.D., an author of the study and head of Vanguard investment counseling & research, in a press release.

A vast majority of the “aware” participant TDF holders understood the fundamental goal and design of the funds, acknowledging that they involve risk and offer no guarantees.

Other significant findings are:

• 77% knew that the asset allocation becomes more conservative as the target year approaches, showing an understanding of these funds’ changing asset allocation.
• 68% recognized that target-date funds offer a diversified mix of stock and bonds.
• 87% believed target-date funds involve “some risk” or more; less than 1% felt they were risk-free.
• Only 8% of participants incorrectly believed that target-date funds provide “guaranteed income.”

Respondents did, however, show some uncertainty about TDF asset allocations at and after the target date.

For example, when presented with a list of attributes that target-date funds might possess, only 24% of the participants indicated that the funds’ asset allocation will continue to change after the target year. In fact, most TDFs continue to change their asset allocation for a number of years past the target year, Vanguard explains.

Also, when asked why they chose target-date funds, 61% of participants cited a desire for a balanced portfolio, simplicity, and convenience.