Combatting Participants’ Misperceptions About TDFs | PLANSPONSOR – PLANSPONSOR

AllianceBernstein’s “Inside the Minds of Participants” study found many misperceptions about target-date funds.

Regardless of whether participants invest in TDFs or not, most lack a basic understanding of how these funds work, according to the survey. Among plan participants overall, fewer than 40% have a clear idea of what the date signifies in a TDF’s name.

The survey found misunderstanding has increased over time. For example, in 2015, 36% of TDF investors incorrectly thought the funds were FDIC-insured. In the 2021 survey, 68% mistakenly believe that.

Fifty-seven percent of TDF investors responding to the survey said they believe TDFs are 100% invested in cash at retirement. Meanwhile, half believe the funds guarantee a person will meet their income needs in retirement, and 42% reported they believe the amounts in the funds are guaranteed never to go down.

AllianceBernstein asked participants who think the funds include guarantees why they believe that. Nearly one-quarter (24%) said the materials about the funds say they are guaranteed, 35% said they believe the year listed in the fund name means it’s guaranteed to be sufficiently funded in that year, and 21% reported that a representative said the funds were guaranteed.

“We know this is not true; it’s participants’ perceptions,” says Jennifer DeLong, head of defined contribution at AllianceBernstein.

Megan Yost, senior vice president, engagement strategist at Segal Benz, says the AllianceBernstein research is consistent with other surveys—research finding that participants invest in more than one TDF show they don’t understand how the funds work.

Many TDF investors are defaulted into these funds and take a hands-off approach to their retirement savings. Still, having misperceptions about the funds can give participants a false sense of security about their retirement savings progress or retirement readiness.

Being defaulted into asset allocation vehicles, such as target-date funds, is a good thing, because when participants are their own portfolio managers, many were allocated incorrectly, DeLong says. “In an ideal world, they would have a better understanding of TDFs, but many people are not comfortable with investing,” she adds. “It’s important to continue to educate participants so they don’t have the wrong idea about their retirement readiness.”

After the financial impact of the pandemic and now with the volatility of the markets, participants are thinking more about their financial security, so it is a great time for plan sponsors to increase education.

Because many participants are defaulted into TDFs, it shouldn’t be a surprise that not all of them understand the funds, says DeLong, but plan sponsors shouldn’t be discouraged by the lack of knowledge because these participants still have more appropriate asset allocations. “There are many participants that do understand TDFs, but plan sponsors have an opportunity to do more education, especially with the events over the past two years making participants ready to do more planning,” she says.

Educating About TDFs

Heather Balley, director of participant communications at AllianceBernstein, says lack of knowledge among participants is not specific to TDFs but to finances in general. “It’s important for individuals to understand their overall finances and where they are invested,” she says.

Yost agrees. “What we know about financial literacy is it builds over time. That’s why it’s important to continue to educate and build on baseline knowledge year after year,” Yost says. “Hopefully that strategy will help clear up some of these [TDF] misunderstandings.”

Balley says when AllianceBernstein works with clients, they first hold a strategy session about what content will be provided and through what mediums. “Education should not just be included in the benefits handbook or fund prospectuses, but perhaps there should be a video to explain what a TDF is,” she says.

Balley adds that information should be provided in easy-to-understand language. There are terms that are obvious to those in the retirement plan industry but not to lay people. These should be defined and used consistently, and pictures and imagery can also be used, she suggests.

Yost suggests that plan sponsors and advisers provide information that is fun, because a lot of investment communication is complex and uses legalese. “Plan sponsors and advisers should think about what they can do in a fun way to enhance understanding, especially if a large portion of the participant population is in TDFs,” she says. “They can share videos and do fun quizzes to help clarify misunderstandings.”

Yost adds that examples are always helpful. “If looking at one [TDF] vintage, examples can help those in that vintage understand conceptually how TDFs work,” she says. She also suggests using analogies. For example, how a plane reaches its goal depending on whether it has a longer or shorter runway. “Try to relate it to everyday life for those people who don’t think about it every day,” she says.

Yost also suggests using a date of birth chart to explain in a different way than with date of retirement which target-date year is appropriate for a person’s age.

Yost says many recordkeepers have a wealth of materials about TDFs, so plan sponsors and advisers can start by talking to recordkeepers about the resources available to them. “Materials might need to be tweaked to match the plan, but you can still provide an education overview without talking about specific funds,” she says. “Ask providers about off-the-shelf videos, interactive brochures and content on their website about TDFs.”

In addition, if a plan sponsor partners with another provider for communications (maybe for annual enrollment), it can see what resources those providers might have about retirement plans and TDFs, Yost says.

Plan sponsors can also look to their advisers to help educate participants about TDFs. “Financial wellness is a hot topic right now, and plan sponsors have been looking to providers for the retirement plan to enhance general financial information. If there’s information about TDFs on those platforms, ask if it can be shared with participants,” she says. “Also, make sure it is clear to participants where they can go for one-on-ones and unbiased advice, if that’s part of the offering.”

Balley notes that AllianceBernstein’s research uncovered different investment personality types, and plan sponsors should try targeting education based on that. “Typically, participants are bucketed by generation, but we don’t subscribe to that,” she says. “There could be a Baby Boomer that is very tech savvy or a younger participant that doesn’t even have a computer or WiFi.”

Just as sites like Amazon can send customized suggestions based on previous views, the retirement industry is on the verge of such custom communication, Balley contends. The three investment personality types were “capable” confident investors, “eager” young and unaware participants, and “conservative” cautious savers. “If plan sponsors can tailor messaging to these groups, they can turn the tide to improve engagement,” she says.

With more talk about providing lifetime income for defined contribution plan participants and lawmaker and regulator efforts to do so, there might soon be more guarantees in participants’ investments. “If plan sponsors turn to providing guaranteed retirement income investments/annuities, that might provide a good opportunity to educate participants about the difference between those guaranteed funds and TDFs,” DeLong says.