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Myths about target date funds

By Jennie L. Phipps · Bankrate.com
Monday, November 7, 2011
Posted: 4 pm ET

Apparently, more than half  -- 51 percent -- of people investing their retirement savings in target-date funds see them as a retirement planning panacea and think that putting their money in them guarantees their retirement income needs will be met.

That unsettling news is from recently released investment management firm AllianceBernstein's Inside the Minds of Plan Participants survey, which gauges worker attitudes toward retirement investments.

Target date funds gradually adjust asset allocations toward more conservative investments as savers near retirement. It's a strategy that can work, but there are no guarantees. My colleague Barbara Whelehan warned in a Bankrate piece two years ago that despite having a target date of 2010, many of these funds lost as much as 40 percent in the 2008 meltdown -- ouch.

"The belief by half of all participants that using these funds guarantees that (people) will have sufficient income in retirement indicates we still have more work to do,"  Thomas Fontaine, global head of defined contributions for AllianceBernstein, said in a statement.

The study asked participants to pick whether they are "active investors" or "accidental investors." Active investors, who are 43 percent of the survey respondents, say they carefully manage their accounts and have confidence in what they are doing. The accidental investors, who are 57 percent of respondents, say they are unhappy with their current financial situation and lack confidence in their ability to do much about it.

From 2007 to 2011, the percentage of investors allocating 40 percent or more of their portfolios to target-date funds has increased to 55 percent for active investors and 61 percent for accidental investors.  Of the active investors in target date funds, 59 percent say they expect that target-date funds will "guarantee that they will be able to meet their income needs in retirement." Accidental investors are actually less confident with only 38 percent believing that to be true.

The reason investors believed in target guarantees was equally unsettling with 27 percent of active investors saying they had been told that by a representative of the company that managed their investments. That same reason was given by only 19 percent of accidental investors.

The bottom line here is that if we are going to have to depend on our own investment abilities and knowledge to retire, almost all of us need more help and education. And the investment advisers we depend on must be persuaded to be completely honest about our investment odds.

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