As CFOs are well aware, target-date funds (TDFs) have become one of the most popular investment options for 401(k) plan sponsors. But an alarming number of workers don’t even understand the basics of this investment option – even when they themselves are investing in TDFs.
In fact, 30% of people couldn’t identify what the “target-date” part of the TDF was referring to, according to a recent SEC survey.
Critical education areas
If your plan offers TDFs, it’s your responsibility to make sure that, at the very least, employees understand the basics of this option.
Here are some things you’ll want to focus education efforts on:
1. The ‘glide path.’ TDFs are a great investment for workers who want a more hands-off approach to saving for retirement by using a mix of assets (stocks, bonds, cash, etc.) and moving from an aggressive to a conservative investment style over time.
It’s called the “glide path.” But when workers don’t understand the purpose of TDF’s performance they tend to add other funds to the mix.
And adding investments can actually screw up the entire target date by altering the mix of investments in the employees’ plan.
2. The no-risk fallacy. While the structure of TDFs is geared toward reducing risk as people get closer to retirement, they are still subject to market changes – i.e, risk.
But 30% of people falsely believe TDFs provide guaranteed income in retirement. That’s the type of misconception firms will want to make sure workers avoid.
3. Personal-risk tolerance. It’s also important that employees understand that an expected retirement year isn’t the only factor in their decision.
Let workers know that age, goals and time frame are all part of a personal risk tolerance and should be reviewed annually. Here’s a simple risk tolerance assessment to pass along to staffers.
