BOSTON ( TheStreet) -- New research by Vanguard may help ease concerns that many who intentionally choose target date funds in their retirement plans may not fully understand how they can, or should, work.There remains, however, a knowledge gap among those who were defaulted into a TDF for their direct contribution plan. The Vanguard study includes a survey of 4,700 investors in January. Overall awareness of TDFs was substantially higher among IRA owners than among plan participants, regardless of whether the respondent actually owned a fund, according to Vanguard. Roughly 95% of TDF investors in IRA accounts reported having "heard of a target date fund," versus 62% of TDF owners in defined contribution retirement plans. "This is not surprising because IRA owners must affirmatively choose to invest in a TDF," the study says. Conversely, 401(k) plan participants who own a target date fund but reported that they had never heard of them may have responded that way because of automatic plan enrollment, through which plan sponsors can place them in qualified default investment alternatives, including TDFs. "Defaulted participants are generally unlikely to take any active role in investment decision-making and so may be much more likely to be unaware of not just TDFs, but also of other features of their retirement plan," Vanguard's study says, estimating that half of the participants holding TDFs in 2009 were defaulted into them.
- 77% knew that the asset allocation becomes more conservative as the target year approaches, showing an understanding of these funds' changing asset allocation.
- 87% believed target date funds involve "some risk" or more; less than 1% felt they were risk free.
- Only 8% of participants incorrectly believed that target date funds provide "guaranteed income." Just 4% of participants incorrectly indicated TDFs provide either a guaranteed return or become risk free at the target date.