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SEC Study: Target-Date Funds are Misunderstood

The SEC has released a study that shows target-date funds are misunderstood by a majority of investors in retirement accounts.  Most of those surveyed did not understand the significance of the year in a target-date fund's name and many believed these funds provided guaranteed income in retirement.  The study analyzed an online survey of 1,000 investors in employer-sponsored or IRA accounts who are not retired and who represent a mix of owners and non-owners of target-date funds.  The SEC proposed rule amendments about two years ago that would have mandated additional disclosure for target date funds.

Findings from the study included:

  • 36% of respondents knew a target-date fund does not provide guaranteed income in retirement (48% of those owning target-date funds answered correctly, while only 26% of those not owning target-date funds got it right).
  • 30% of all respondents could identify the correct meaning of the year in the fund's name.
  • 54% of all respondents failed to understand that target-date funds with the same year in their names do not necessarily contain the same mix of stocks and bonds at the target date.

The top reasons owners gave for investing in target-date funds were the perceived safety of the investment (41%), diversification (40%) and convenience (35%).

A link to the study can be found on the SEC's website here:  http://www.sec.gov/comments/s7-12-10/s71210-58.pdf

The text of the rule proposal is here: http://www.sec.gov/rules/proposed/2010/33-9126.pdf