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Better and better, it turns out. Which is a good thing, because despite years of education, the skills and confidence of the average investor are not improving.

Target-date funds bull's-eye do-it-yourself investing
According to a recent study commissioned by John Hancock Retirement Plan Services, "an overwhelming majority of 401(k) investors, 69%, believe they lack investment knowledge, and 67% said their fear of market volatility prevents them from managing their 401(k) properly."

That's a pretty scary statistic, if not exactly surprising. Given people's tendency to over-report their own competence, the true numbers might be even worse. And remember, this is just among people who are actually participating in their plans, so it doesn't count the stubborn ranks of non-participants. All together, I'd hazard a guess that up to 90% of potential investors still aren't getting everything they need to prepare for retirement.

The solution for participants who are simply not comfortable or confident making their own investment decisions, the report goes on to explain, is lifestyle funds (or target-date funds by any other name). Eighty percent of John Hancock's plans now offer these as an option. And for good reason: a number of studies have shown that people invested in target-date funds do significantly better than those who pick their own portfolios. If you're at all familiar with the behavior of 401(k) investors, that should come as no surprise, either.

Beating the odds
The actual numbers may be surprising, though. According to another John Hancock study covering 2000 through 2004, participants in their "lifestyle portfolios" earned from 3.15% to 4.24% better returns than plan participants who picked their own portfolios at the same levels of risk. Considering that this period included some grim times for the markets, that meant earnings gaps of more than 100% versus the do-it-yourselfers - and for some people, the difference between making and losing money overall.

So are these funds truly the Next Big Thing? Sort of. If you hold managed accounts to be the gold standard (you do, don't you?) and look at target-date funds from that perspective, they're virtually the same thing, with one big difference. Instead of applying a range of variables to match the investor, they use just one (or two): the target maturity date, plus (usually) a broad measure of risk tolerance.

It's all good
Would it be a good thing if every new 401(k) investor defaulted into a target-date fund? Definitely, and even better if they did it at an aggressive savings rate. Would it be the greatest thing since sliced bread? Not quite, because there are still some issues with them. I tend to think of today's retirement investing options as a good-better-best scenario:

• Good: Participation of any kind. Again, let's not forget that getting people into the plan is still half the battle for a big slice of most employee populations.
• Better: Diversified asset allocation and regular rebalancing, matched to the participant in some way. Target-date funds are a powerful, cost-effective way to provide them, using investment horizon and risk for guidance.
• Best: Full managed account services, including numerous variables in the investment equation. Ironically, at this level risk is no longer an "input." The participant's needs and goals determine the level or risk required to meet them.

Better still There's nothing wrong with good or better. And by adding a component that recommends the individual savings rate to a standard set of target-date funds, you could achieve a very effective "better-still" approach.

We believe that when companies consider the financial well-being of their employees, there's very little reason not to choose the very best. But of course it is their choice. The important thing is to provide the most benefit for the most people however we can, given the market and environmental conditions of this industry. So it's comforting news indeed to see that an increasingly popular approach for retirement plan investing is producing much better results than "better than nothing."