What People Know about Target-Date Funds: Survey and Focus Group Evidence

Julie AgnewLisa R. SzykmanStephen P. Utkus Jean A. Young

FSP#2011-2

Abstract

Making portfolio allocation decisions can be difficult for American households who lack interest or experience in financial matters.  Service providers and 401(k) plan sponsors have introduced new plan design approaches and investment products, such as target-date funds, that can simplify savings and investment choices for defined contribution (DC) plan participants.  Some participants invest in the funds on their own; some are defaulted into the fund by plan sponsors through mechanisms such as automatic enrollment, so it is important to understand how knowledge and awareness may differ between active and passive investment decisions.  Also, DC plan participants often invest in other assets within their retirement accounts, a phenomenon known as “mixed” target-date investing.  This paper seeks to better understand the determinants of participant portfolio allocations to target-date funds.  The authors use focus group discussions and survey evidence linked to 401(k) administrative data.  They explore rational motivations for portfolio decisions, psychological elements such as trust, and the relationship between financial knowledge and portfolio choice.  The current version of this paper presents a preliminary analysis of the survey data and the authors’ focus group findings.