Certified Plan Sponsor Professional (CPSP) Practice Exam

Why are money market and target-date funds popular among default options?

1. They are the only allowed options in default settings

2. They are perceived as safer choices for inexperienced investors

3. They provide the highest returns

4. They require no management from the participants

The correct answer is: They are perceived as safer choices for inexperienced investors

Money market and target-date funds are often favored as default options primarily because they are seen as safer choices for investors who may lack experience or familiarity with investing. Money market funds traditionally invest in low-risk, short-term securities, which helps to preserve capital while providing some liquidity. Target-date funds are designed to automatically adjust their asset allocation based on the investor’s time horizon, gradually becoming more conservative as the target date approaches. This feature is particularly appealing to inexperienced investors since it aligns well with the common investment goal of retirement savings without requiring them to actively manage their investment strategy. The perception of safety associated with these types of funds contributes to their popularity in default options, as they can help alleviate concerns about potential losses that inexperienced investors might face when navigating more volatile investment choices. Their design, particularly in the case of target-date funds, often includes a diversified mix of assets which can further enhance this sense of security.