Investors' Views About TDFs Have Evolved

Voya Investment Management has published the third survey in a series exploring the preferences of target-date fund (TDF) investors, titled “Participant Preferences in Target Date Funds: Fresh Insights.”

According to Voya researchers, the updated data clearly shows that investors’ views have evolved in relation to TDFs. For example, now more than two-thirds of respondents reported they “prefer TDFs that offer a mix of both active and passive managers for enhanced diversification.”

Voya says it is encouraging to see investors develop an understanding of portfolio diversification strategies that go beyond rote asset class descriptions to consider investing style. Digging down into the numbers, Voya finds “fewer than 25% preferred all active TDFs, while only one in seven preferred all passive,” a reflection of recent equity market swings and an emerging macroeconomic environment judged by many to be much more favorable to active management than the conditions of recent years.

In addition, the survey found most participants “prefer multi-manager TDFs with a mix of both proprietary and nonproprietary funds.” Importantly, Voya notes, these findings only stand for the cross section of investors who actually took the optional step of expressing a preference on this particular segment of the survey. There was a sizable swath of the 1,000-plus respondents who did not choose a preferred TDF strategy, whether active, passive or blended—suggesting a need for ongoing basic investment education, even among TDF investors.

“Overall, we found investors value the diversity [available through TDFs],” explains Paul Zemsky, chief investment officer for multi asset strategies and solutions. “One problem we found was that many participants use other funds to diversify their holdings away from a TDF, in other words, to avoid putting all their eggs into one basket. What they might not realize is that TDFs already contain many baskets.”

Even with some lasting TDF misunderstandings, Americans are gaining modestly in retirement confidence. Among participants ages 25 to 49, 44% agreed with the statement, “I’m confident that I will reach my retirement goals,” whereas 54% of those older than 50 said they were confident. Across all age groups, men expressed higher confidence than women, Voya finds, suggesting that it “may be beneficial for educational programs about target-date fund benefits to focus on younger participants and women.”

NEXT: Millennials are big fans of TDFs

Voting with their dollars, Millennials show greater interest in TDFs than do Generation Xers or Baby Boomers, likely because they have been introduced to them from the very beginning of their careers.

“Use of TDFs is likely to increase as Millennials come to represent a greater portion of plan participants, and the use of auto-features continues to gain traction,” Voya predicts. “Millennials also show keen awareness of the need to save for their retirement, even though significant numbers of them have postponed doing so.”

As the Voya data shows, few one-off actions can boost retirement confidence the same way as enacting a regular salary deferral into a TDF. A strong majority of current TDF users, more than 75%, felt using TDFs alleviated the stress of retirement planning and reported increased confidence that they were making good investment decisions. Beyond this, 63% of TDF users, up 10% from 2011, felt confident they would meet their retirement goals, versus just 48% of non-users. Median deferrals into TDFs, finally, represent 2% more of investors’ income compared with non-users.

Similar to past surveys, Voya finds many (42%) choose to invest in TDFs “because of their simplicity,” while a smaller number (32%) said that performance was the primary criterion. Diversification is also key: Both users (91%) and non-users (67%) show a strong preference for TDFs or other products  that incorporate a broad range of asset classes.

“Eighty-six percent of users expressed interest in TDFs managed by multiple investment advisers to take advantage of their specific expertise,” Voya says. “What’s more, the survey found a strong interest in auto features, with 76% of TDF users believing that auto enrollment into an employer’s retirement plan would be helpful. Seventy-two percent also felt that auto escalation would be a benefit.”

The research concludes interest in TDFs is linked to generations—Millennials show the highest level of interest followed by Generation X and then Baby Boomers. More information about this and other Voya research is at www.voya.com.