Target-Date Funds Misused by Half of Plan Sponsors

A survey by AllianceBernstein L.P. shows that only about half of plan sponsors are using Target-Date Funds (TDFs) as their default even though over half offer them in their contribution plans. This ineffective use of TDFs comes at a time when usage and satisfaction with TDFs continues to grow despite unimpressive stock market performance.

“Even in the wake of a continuing decline of Social Security and defined benefit plans as primary sources for retirement income, our recent research shows that many plan sponsors are still struggling to find the best way to structure their DC plans,” says Joe Healy, head of AllianceBernstein’s Defined Contribution Client Experience. “While more and more sponsors recognize the benefits of offering an age-based, asset-allocation investment solution to their participants, they fail to realize valuable fiduciary protections by not designating these funds as their plan’s default.”

The survey found that of the 50 percent of sponsors offering TDFs but not as the default, 83 percent have no default or are using a stable equity or bond fund as the default. Most mid-sized and large plan sponsors are also not leveraging their assets for providing customized TDFs. Just 22 percent of large and 21 percent of medium-sized companies reported using a customized TDF. Over one-third of large sponsors haven’t used customized TDFs due to ignorance of the benefits.

“It’s striking that despite the almost polar opposite behavioral differences between active and accidental investors, both groups give TDFs high marks. It certainly suggests that sponsors can stave off behavioral biases and encourage savings by defaulting people into easy-to-understand investment solutions like TDFs that also provide sophisticated asset-allocation features to satisfy savvy investors,” Healy said.