by Bob Brooks
October 14, 2014
Everything about the concept of a Target Date Fund is all wrong. The mutual fund companies are making these staples in most 401 K plans. They are marketing that these are funds that you can invest in and forget about. Of course, this is a dangerous mind sight for any investor. To be successful you need to monitor and track your results versus burying your head in the sand in hope that an industry with a self-agenda of making money first is going to look out for your best interest. One of the bigger problems for investors is that they don’t pay attention.
Target date funds are designed to target a particular retirement age. So, if you are retiring in 20 years then you would select Target Date fund 2034 which would be the selected retirement year. The notion is that they fund would gradually reduce your exposure to stock as you get older.
Reuters reported some disturbing news:
“BlackRock, Fidelity Investments, and Pacific Investment Management Co. (Pimco)—all firms that have seen returns in their target date funds lagging competitors—have made adjustments in the past year so that 401(k) plan participants, particularly those who are younger to middle age, are more invested in equities. In some cases employees who are in their 40s now find themselves in funds that are 94 percent allocated into stocks, up more than 10 percentage points.”
Said another way, instead of sticking to their risk based formula of adjusting stock exposure with age, they are increasing stock exposure because their performance is lagging their peer group. They are taking additional risk to capture additional return. So much for that risk protected strategy.
Ironically, they are also increasing exposure to stocks and potentially the wrong time. Today, we are in the 9th inning of a way over stretched bull market. I wouldn’t look characterize today as a time when I would want to be all in when it came to stocks.
In addition, the average expense ratio is .85% as compared with a balanced fund. The mutual fund companies justify the higher expenses because “investors are paying more for peace of mind and a set-it-and-forget it approach to managing their retirement money.” You are basically paying more for a one time a year rebalancing between stocks and bonds. I hate to tell you – that isn’t rocket science or worth higher fees. Also there is a huge difference between re-allocating and managing money.
Investors are marketed that they are getting a :forget about it” risk based investment strategy appropriate for your age. In reality, it looks like they are more concerned with performance chasing then their original fund mandate. They did the same thing right before the financial crisis and it turned out to be disastrous. You would think that these companies would learn.
Do yourself a favor, do your own asset allocation and save the money and the potential added risk. By investing in Target Date funds, the only favor that is being done is for the mutual fund companies.