Target Date Funds: Still Off Target?
Marc Fandetti (Meketa Investment Group) | March 6, 2013
This article examines briefly the performance and composition of “shorter-dated” target date (“TD”) funds, defined by the author as those intended for participants within a dozen years of, or already in, retirement. Morningstar, which tracks 111 such funds, is the source of all data used. Such funds performed worse in the severe market crunch of 2008 – far worse in some cases – than investors were likely expecting. This is now widely recognized. More importantly – and disturbingly – shorter dated TD funds remain too aggressively invested in most cases, delivering performance (and exhibiting risk), on average, in line with pension funds.
Since pension funds likely have a longer-term investment horizon than most shorter dated TD fund investors, the average shorter-dated TD fund is almost certainly more aggressively invested than the average near-retiree/retiree can tolerate. However unlikely the prospect of a substantial stock market decline may seem in the exuberant present, the potential for large stock market losses remains. The next “bear market” will make retirement unattainable, permanently, for many.
A quick survey of shorter-dated TD funds reveals that there are disappointingly few choices for investors at or in retirement and seeking a relatively conservative TD option. Plan sponsors should consider alternatives, such as “custom” TD funds, when the shorter-dated TD fund component of a TD fund manager’s offerings exhibit pension-fund like risk and return.