New research from the US shows that a high proportion of both pension fund sponsors and individual investors are misusing target-date funds, which is likely to lead to suboptimal investment outcomes. The research, by global manager Janus Capital in association with a magazine company and a research group, shows that investor education is particularly inadequate for these types of funds, where 20 per cent of those who had target-date funds thought the products came with a capital guarantee. More than two-thirds believed they needed to be blended with other funds, even though the whole point is that the vehicles are balanced but with asset allocations which change with time , thus designed to be used as default options.

John Landau, Janus’ Australian head, said that, from an Australian perspective too, the industry needed some sort of consensus on what should be the glide path to retirement. He said Janus did not have a barrow to push, being an underlying manager rather than packager of investments, but wanted to bring out some of the issues for discussion. It might be, for instance, that investors would be better off with traditional balanced funds which were easier to understand. Target-date funds have been slow to take off in Australia, compared with the US.

The main distribution channel is the Russell Investments range of multimanager products. However some big super funds are known to be building their own, to either replace their default funds or provide an additional option. The research includes some surprising results. For instance, investors do not apply the same level of due diligence in selecting target-date funds as they do with other managed fund products. And, while financial planners play only a limited role in this market segment, when they are involved their assumptions are often no more accurate than those made by their clients. The report also notes that the majority of money which has flowed into target-date funds in the US has gone to single-manager products despite the greater purity – in theory at least – of multi-manager offerings.

Key findings from the research, conducted by Brightwork Partners in conjunction with ‘Plansponsor’ magazine, of 6,000 plan sponsors and 503 individual investors, included: • Over-diversification: Most holders own about six funds (target-date and other managed funds) and older investors tend to retain legacy funds after selecting a target-date fund. One-in-six respondents held at least two targetdate funds. • More than 40 per cent of holders who relied on their employer selected the year they planned to leave the company as the target for the fund, even if they did not intend to retire then. • The employer’s 401(k) record keeper was the most relied upon source of information (49 per cent), followed by independent research on the internet or elsewhere (29 per cent) and then advice through the plan from firms such as Morningstar (27 per cent).

Only 13 per cent got information from an adviser not connected with the plan. • About 40 per cent of plans did not evaluate each target-date fund when adopting a new target-date series, even when nearly all believed that they should. • The majority of plan sponsors offered only single-manager target-date funds, yet three-quarters believed multimanager products were a better choice. The Janus report concludes: “If target-date funds are to become the preferred retirement investment vehicle for defined contribution plan participants, every key stakeholder in the industry – plan sponsors, record keepers, funds managers, consultants, advisers and regulators – must share responsibility in addressing these challenges and furthering education to help [investors] achieve more successful retirement outcomes.”

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