They are hot and hold billions of investor dollars and I’m not a big fan. Their fund literature informs investors that Target Date Funds are the retirement cruise control of the investment world and owning one gets automatic asset allocation as the investor gets closer to retirement. There are Target Date funds for just about any year you plan on retiring. You pick a year and there is a Target Date for it. Plenty of mutual fund families have them. Mostly they are evident in company sponsored 401k plans. Many employers make Target Date funds the default investment when an employee indicates that they know little if anything about saving and investing.
Target Date Funds are great for those people who do not want to be bothered with a broker, a financial planner or thinking about money management.
Target Fund aficionados have raved about these mini-allocated so-called jewels that have not lived up to their hype. Proponents of Target Date Funds argue that critics should just give them some more time as the funds are in growing pains and finding their way. I say there is more wrong than right about these mutual funds.
Fans of Target Date Funds say that the funds are getting better. This is no help to those that have already bought and been experimented on.
I do indeed get the part that if I don’t know a dividend from a box of kitty litter that a Target Date Fund is a better place for my money than a money market fund. That I do get. But, what I don’t understand is what kind of return can I expect, total portfolio value or income when the time comes for me to retire and sit on the couch watching The Price Is Right for all eternity.
All the Googling in the world doesn’t tell me anymore than Target Date Funds operate under a recipe based upon either date of retirement or investor risk. It doesn’t tell me whether I’ll have more or less or a lot more than I contributed to the plan. More importantly it doesn’t tell me what to do to create an income plan once I retire.
Target Date Funds create more questions and possible problems than answers or solutions. What happens at retirement? Does the investor reallocate and what investments should he or she use? There doesn’t seem to be an answer and I don’t know if a Target Date investor starts over or buys bonds or just hauls the money to the nearest bank.
Experts tell you that when using Target Rate mutual funds you should use them exclusive of any other investments. In other words, opportunities that become available because of the economy or the markets could very well be lost because of the insistence on Target Fund management being the be all fund manager.
The Target Date literature brags that investors get professional management. If that is the case Target Date Funds certainly did not protect assets when the global markets collapsed. An investor in a Target Date Fund lost asset value just like any other investor. The sad part is that if an investor is planning on retiring not many years after the market crash chances are that the fund will not recover the losses because of its investment mandate of getting more conservative as time goes on.
I could have owned a 2010 dated Target Date Fund in 2008 and still watched my portfolio tank.
The other thing is that not all Target Date Funds are equal. If planning on retiring in 2020 you’d expect that the allocation and returns would be similar between various fund company’s Target Date Funds for 2020. They are not. Which leads me to think that perhaps some fund companies define conservative or moderate as something different than another fund company. I don’t understand how that can be.
Researching I read Investopedia’s take on Target Date funds and they did the analysis (because someone has more time than me) and reported that not only was the asset allocation different from one similar dated Target Fund but so was the risk and style. Some funds use active management and others use index funds. So funds are managed differently even though they have the same maturity date goal.
Target Date Funds are not inexpensive. The cost of managing them across a wide range of assets is more expensive than investing in a single mutual or exchange traded fund. The average expense charge is 1.45% versus an average equity fund expense charge of 1.00%.
The Target Date funds all increase their portfolios with bonds and cash the closer an investor gets to retirement age. The purpose is to reduce the volatility (which it did not as we look back at 2008). The average Target Rate Fund with investors two years from retirement still lost on average more than 20% of its value.
A better way to explain it would be that as time goes on the fund eliminates the opportunity for growth.
The conclusion I arrived at was that Target Date Funds are better than simply socking money into a money market. For the semi-sophisticated investor it is still a lot of work to manage your retirement using a Target Date Fund. There are too many unknowns from one company fund to another. It’s like getting on an airplane and you don’t know whether your pilot is going to be Sully Sullenberger or some character that doesn’t know a horizontal stabilizer from an aileron.
Buy Target Date Funds only if your choice is that or money markets and you don’t really care where you end up at retirement or with how much. For the rest of us there are better and more efficient ways to manage your retirement portfolio.
Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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