Your 401(k): Target Date Funds Disappoint
Target date funds are supposed to offer more security, but do they really?
Feb. 23, 2010 — -- By one estimate, target date funds are becoming the $2 trillion leader in the retirement savings world.
But there's much discontent over the early track record of these funds that are supposed to provide an easy and secure way for today's workers to manage their own retirement portfolios.
If you put money in a target date fund, your investments are rebalanced automatically to a more conservative mix as your retirement year approaches. Hence, 2045 funds appropriate for today's 30-year-olds should be invested much more aggressively than a 2010 fund aimed at someone looking to retire this year.
The popularity of target date funds has soared since a 2007 federal regulation allowed them to serve as default investment choices for employer-sponsored retirement plans that automatically enroll newly hired workers.
BrightScope Inc., which rates company 401(k) plans, projects that by the year 2020, target date funds will hold more than $2 trillion and represent a third of all 401(k) assets.
The current discontent over target date funds stems from their dismal performance during the 2008 market meltdown -- particularly for investors closing in on retirement, who saw their nest eggs drop by 25 percent or more.
Among 31 funds targeted at a 2010 retirement, the average loss in 2008 amounted to nearly 25 percent, according to figures cited by Securities and Exchange Commissioner Chairman Mary L. Schapiro. The 2008 losses for these 2010 target date funds ranged from a low of 3.6 percent to a high of 41 percent.
As a result, target date funds have come under scrutiny from Congress, the Securities and Exchange Commission and the Department of Labor.
Earlier this month, Schapiro announced she would be proposing this year new disclosure and marketing rules for target date funds. She said the SEC will "confront the issue of the potential for target date fund names to confuse investors, or lull them into a false sense of security."
She cited her concerns about target date funds advertisements that she said in some cases "perpetuate a 'set it and forget it' mentality, which is concerning."
