Retirement Date Funds and Chocolate
While professionals warn against them, Retirement Date (“Target Date” and “Lifestyle”) funds have grown in popularity - particularly in 401(k) and 403(b) plans. The idea behind these "set it and forget it" funds is simple: Choose a year you plan to retire - 2015, 2020, 2030 etc., – and then invest in a fund that names the closest year.
The idea behind Target Date Funds is good: a comprehensive portfolio that becomes more conservative as retirement nears. But the concept has been lost in the manufacturing process. So lost, one reporter calls them “a dangerous rip off.”
This is where chocolate arrives: Target Date funds are like a box of chocolates, you never know what you’re gonna get.
And this is where chocolate goes away: With chocolates you usually wind up with something good regardless of what’s inside.
Dozens of fund families offer Retirement Date funds. But differences in fees, allocation, and returns are staggering. Tim Middleton of MSN Money reports in 2008 the Oppenheimer Transition 2010 fund lost -41.5% compared to -3.6% of another Target 2010 fund.
Of the problems inherent in these funds, arbitrary risk modeling is the most dangerous. “Target Date investors got run over by a truck and didn’t know why,” said David Krasnow of Pension Advisors.
Investors generally conclude these funds take a protective stance – diversifying and decreasing potential losses over time. This dynamic asset allocation should create an appropriate “glidepath;” the same as a guidance system directing a landing plan would.
Oddly, there is no standardized method for determining the glidepath for investors. Some funds are aggressive at the proposed retirement date, extending their glidepath for another 30 years. Others are mostly cash on the same date. Investors find out which plane they are on when one crashes.
So how does a good idea go awry?
Target Date Funds utilize a “fund of funds” design. A Target Date (host) fund invests in other funds. The underlying funds have management fees and are usually actively traded, incurring additional costs. The host fund adds another layer of fees to manage underlying funds.
Manufacturers argue additional fees are deserved due to scrutiny when choosing and managing the underlying funds. I won’t argue they don’t have methods. But I will note how and what they will be managing in the future isn’t knowable, and usually the underlying funds are manufactured by the same family or by another company with a fee sharing arrangement in place.
Read in that what you will - but complaints against “excessive fees” in Target Date funds abound. And the train doesn’t stop there.
The majority of Target Date funds are hardly diversified according to academic standards. They weight toward large U.S. companies and intermediate bonds, scattering smaller percentages across other asset classes. Historically, this approach has not significantly reduced relative risk or increased return…reasons we diversify in the first place.
MIT PhD Zvi Bodie states, “The damage is done by the inherently misleading name of the fund. They have nothing whatsoever to do with target dates. Nothing happens on the target date. Nothing is promised on the target date.”
Recently I showed a client how he would have previously boosted his return by almost 3% per year by putting 50% in a broad stock market fund and 50% in a broad market bond fund – instead of a balanced Target Date Fund.
He said, “It looks like they are just charging more for the same thing I already have.” My response: “It’s a good gig if you can get it.”
I welcome questions and comments.
Warmly,
Marc Becker
For more insight on Target Date Funds:
Stop the 401(k) Rip-off!: Eliminate Costly Hidden Fees to Improve Your Life.
http://www.thestreet.com/story/10389236/1/beware-excessive-fees-on-target-date-funds.html http://articles.moneycentral.msn.com/Investing/MutualFunds/target-date-funds-aim-elsewhere.aspx http://www.kiplinger.com/magazine/archives/2008/02/target_funds_under_fire.html http://www.iplanretirement.com/retirementblog/asset-allocation-a-dangerous-rip-off/ To read past articles and view past videos, visit:
www.marcbecker.tv
Golf Tip of the Week Try the Woodcutter Shot My old friend Phil Rodgers, an ace short-game teacher, has helped me a lot with the little shots over the years. Back at the British Open at Muirfield in 1966, he taught me a way of escaping from what seemed like an impossible situation in sand, which has saved me a number of strokes since.
The technique is employed when the ball is near the rear bank or wall of a bunker that is too steep to permit a normal swing.
Assume your normal bunker shot set-up and stabilize yourself for a hard hit by wriggling your feet deep into the sand. Once you are secure, simply pick the club straight up by folding your arms exactly as you would to chop an axe into a log lying on the ground. Then hit down very hard with your right hand two inches behind the ball.
Your objective is to shock the ball out by burying the clubhead in the sand behind it, so forget about a follow-through.
Visualizing the action as strictly up and down, woodcutter-like, rather than back and forth, golfer-like, will help you execute it effectively.
Source: http://www.nicklaus.com/nicklaus_golftips/
Trivia Time This week's question: In what area of the world did chocolate originate?
Do you know? E-mail your answer wendy@wiserfinancial.com and if you are correct, receive a free "Way to Go!", "You Rock!", or other congratulatory phrase. Then brag to all your friends about how smart you are.
The answer will be in next week's newsletter!
Last week's question: In what year was the first Labor Day Celebration?
Answer: The first Labor Day was celebrated in 1882 in New York City.
Congratulations to David R. once again for getting the correct answer!
Source: www.dol.gov
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