Employee Misperceptions About Target-Date Funds

Why are there misperceptions?

There is a flood of concern about target date funds flowing through the press. The noise is so loud that the Department of Labor and the SEC are going to hold a joint hearing on them in June.

But WHY are there misperceptions?

The answer is simple: Lack of education. Who educates Americans on money or savings, let alone investing? Learning how to handle money should be as much a part of our educational curriculum as sex education -- after all, most of us can't live without either. Yet, how many schools offer financial literacy courses?

Target date funds are an asset allocation tool for savers. They are better than most traditional choices made by retirement plan participants -- most of whom either don't choose or make terrible decisions. Too many plan participants retain their contributions in cash or cash equivalents and don't benefit from investments that keep pace with inflation and achieve a reasonable rate of return (the "savers"). Too many other plan participants -- the "amateur investors" -- retain their contributions concentrated in company stock or in high risk non-diversified investments inappropriate for retirement assets. Target date funds offer a middle ground -- even if imperfect.

Most inquiries into the misperceptions of target date funds are aimed at the symptom -- not the cause. Your post reflects the real issue - lack of investing knowledge. But, convincing Americans to take charge of their financial health is about as easy -- and as successful -- as convincing them to take charge of their physical health. That is why efforts by Congress and regulators to correct this by piling on more written disclosure to an already overwhelmed (and apathetic) participant population is just NOT the answer.

The solution is education - both early and often. For adult plan participants, companies can begin by requiring attendance at educational seminars where individual financial profiles are completed. Regular, mandatory follow-up meetings to reinforce participants knowledge and choices should be the norm. For our young people, courses that teach about money, credit, saving and investing must become a fundamental part of our educational process.

The goal must be financial literacy for all. Only proactive education will produce a more informed and more well prepared group of retirees.

Joan Bozek of CT @ May 16, 2009 19:15:52 PM