July 5, 2010
Target date funds designed to steadily re-allocate away from equities and into fixed income investments as time goes by-- in order to adjust the risk to ones age-- miss the mark on three counts. First, the average conservative fund with a date of 2010 lost 23% in 2008, wich indicates the risk is not being properly managed. Different fund companies have different allocations and use different stratgies and there is no standard mix of stocks, bonds and cash on a year by year basis. Second, target date funds do not take into account risk tolerance, only age. The psychological impact of a bear market is just as important as long-term risk management, because the majority of investors sell at the bottom if they are not prepared for the downside and, the downside was not properly disclosed going into 2008 resulting in a stampede out of target date funds later that year. The third problem with these funds is their expense: a proper mix of cheaper index funds would trounce the return of most corresponding target date funds, and a simple rebalancing every year would supplant an active fund manager and thereby boost returns by reducing costs. Therefore, the SEC should prescribe a mix between equity index funds and bond index funds that should be rebalanced each year going into retirement. All "Target Date" funds" should be compelled to follow the course. In addition, a maximum downside loss should be displayed per year in a table for each allocation set and the table placed on the first page of the prospectus, most importantly in the enrollment material given to 401k participants. Thirty percent of plan participants select a target date fund, not knowing what risks they really own. It is time the SEC and the DOL did something about that before those investors are shocked again.