Missing the Target
Source: WSJ


You may have missed the WSJ’s takedown on Target-date funds this weekend. Its a must.

The idea of target date funds are a form of auto-pilot that automatically shifts allocations into more bonds less stocks as the investor ages. Target date funds now manage about $550 billion dollars.

The problem with these funds — aside from high fees and higher-costs — is how out of phase its been with the markets for retiring babyboomers. Many of them have found they are selling equities into weakness and buying bonds into a 30 year bull market which is looking kinda old and shaky.

Anyone with a 401k or who uses these funds should definitely give the article a read.


Missing the Target
WSJ, June 14, 2013

Category: 401(k), Investing, Mutual Funds

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Shorter WSJ: Beware Target Date Funds”

  1. Yacht Rocker says:

    WSJ article is subscriber only. I’m don’t follow Wall St day-to-day, but I get the gist.

  2. DeDude says:

    Whereas in the current situation rebalancing seems stupid, that is often the case with automatic rebalancing. The alternative would be for investors to pick the timing of their rebalancing (and only conduct rebalancing when it seems “smart” to do). The investors using these funds are not the best people to figure out how to time the markets. The high fees are problematic and hopefully some kind of market forces will help push them down.

    • willid3 says:

      so far the only thing that seems to make it more transparent is the government forcing the publication of the fees. otherwise nobody but the companies involved had any idea what the fees were. and neither of them paid those fees they were passed onto employees/investors. so they had no interest in reducing them

    • ottnott says:

      Agreed, though the target funds will tend to do a lot more one-way shifting than two-way rebalancing.

      Imagine the WSJ writing an article about target funds in March 2009. It would have talked about how fortunate target fund investors had been to have assets shifting out of stocks when things looked great for stocks and into bonds right before huge cuts in interest rates.

      I have a small retirement fund in a target fund, largely because the fund will do something I don’t do on my own – invest in bonds.

      But: its a small part of overall retirement money; I picked a target date 10-20 years beyond my expected year of retirement; and the money shifts gradually from stocks to bonds.

      As long as you are aware that retirement funds may have to serve you for decades, and so should include stocks for long-term growth, I don’t see any problem with making use of an automated vehicle for shifting money out of stocks over time.

  3. rd says:

    Target date funds are a great microcosm of the financial industry. Many of the firms take what could be a great product, structure it improperly and layer on oddles of fees. A few others take a pretty customer-oriented perspective on them.

    Our 401k has a well-known target-date fund in it based on the Dow-Jones index for them. However, a recent restructuring of the funds available in the 401k meant that I could get a very similar overall portfolio with quarterly rebalancing for an average expense ratio of about 0.35% instead of the 0.56% of the target date fund. Interestingly, a signfiicant percentage of the cheaper portfolio is in active funds compared to the target date fund which is entirely indexed.

    The Vanguard TD funds are my preferred when they are available. The T Rowe Price TD funds allow for no minimum investment if you sign up for at least $50/month automatic debits which is a great vehicle for a young person in their first job setting up a 401k.

    Many of the TD funds restructured their glide path to be more conservative after the 2008-2009 crash after they saw their performance for people in their 50s and 60s then. It will be interesting to see if they stick with that when a secular bull runs for 10+ years.

    Some of the balanced fund families with relativily fixed allocations, like the Vanguard LifeStrategy Funds, are a pretty good approach a few years before retirement into retirement once you have a handle on the nature of your overall portfolio, including home, pension, retirement savings, cash savings, etc.

    • rd says:

      For the T Rowe Price TDs, I meant to say IRA instead of 401k is where the no minimum investment with automatic debits is a real benefit to a young investor starting out. Usually this would be a Roth IRA.

      The minimum investments don’t matter with 401ks.

  4. bear_in_mind says:

    @DeDude: FWIW, you likely missed Barry’s comment last week (it was deep in a comment thread, after all) that in his estimation, rebalancing ought to be automated based on predetermined criteria (or algo) versus having emotions involved when trying to time the market.

    @Barry: In my workplace, I’ve steered several colleagues away from target-dated funds strictly based on annual performance. These funds have done terribly in the last 36 months and that’s not including the 5x service fees imposed versus a simple 60/40 allocation split of VINIX and PTTRX.

    There’s a few specialty (small-cap, mid-cap, int’l) mutual funds, but their service fees are almost 100 bps, so figure we’re better off over the long haul with 4 bps (.04 fee) with the VINIX. Pleas for ETF’s have fallen on deaf ears thus far.

    I’m a bit nervous about PTTRX, but trust PIMCO is well-prepared for the onset of a bond bear market. Only other option is money market fund w/ “guaranteed” 2.1 pct (after fees).

    • DeDude says:

      Agree, that given the current fee structures it is much better to do the evolving allocations yourself, rather than having your money in these targeted funds. If you have automatic rebalancing and just manually reset allocations every year according to a predetermined plan, then you can save a lot of money on fees. But there is a temptation to deviate from the plan at that annual revisit and adjustments of allocations.

    • DeDude says:

      We need some targeted date “index funds” with a defined ratio of a stock index fund and a bond index fund. That ratio should be slowly changed every year to become more bond heavy. It should rebalance itself to stay within that ratio (within a certain tolerance). This fund could be run by a computer program and should be able to have very low cost.

  5. freitagfan says:

    This is the 3rd article I’ve read in the week telling me these are a horrible plan. That tells me it’s almost a guarantee to outperform the alternative. I absolutely LOVE how automatic rebalancing is now a bad thing because smart people can routinely out perform by timing it themselves. Genius.

    • The same is true for portfolio tilting — away from 80/20 to 70/30 to 60/40. If you read the article, you will learn the biggest drag on these are high fees.

      (And you apparently missed my comment last week that both rebalancing and portfolio tilts ought to be automated based on predetermined criteria or algos)

    • CSF says:

      Freitagfan, you and Dedude make a good point that rebalancing should be automatic. However, the WSJ article raises the separate issue of target funds actually changing the baseline allocation as the investor ages. Unlike rebalancing, which takes advantage of mean reversion by selling winning asset classes and buying losing ones, target funds might do the opposite.

      • DeDude says:

        The generally accepted strategy is that baseline allocations should change more towards bonds as people get older, and target funds automatically does that change in baseline allocations. Right now it seems like a bad thing because bonds (presumably) are likely to take a hit pretty soon. But that is specific to current times, not to the strategy as a whole. Within the target funds I presume there is also rebalancing going on. If in a given year it is supposed to be 72/28 and get away from that ratio, I presume that they rebalance.

  6. Ramstone says:

    As rd says, target date funds can be ideal if the fees and allocations are reasonable, a la Valley Forge. Unfortunately, if your trustee chooses expensive plans, a la Boston, with glidepaths that change with the fashion, a la Baltimore, guess what?

    I will say that these QDIA funds do get a significant percentage out of level 0 investing — the 30 year old in Stable Value, or the retiree in company stock, but as we know there’s a long way to go.

  7. rd says:

    BTW – I would take almost any Target Date fund out there over the guaranteed benefits fo a City of Detroit pension plan run by sophisticated investors: