Yet another article has been published on how target-date funds are eschewing their reputation for being too conservative and are taking on more risk.
A number of target-date funds are investing in real estate investment trusts, emerging markets stocks, inflation protected securities and other alternative asset classes, The Wall Street Journal reports. The thinking is that in and of themselves such investments can be risky, but as part of a well-diversified portfolio, they can offer investors opportunities for upside when various segments of the market are suffering.
Verizon Communications, for instance, recently added target-date funds to its 401(k) to replicate the holdings of its pension plan available to union employees.
“When we talk to CFOs who are involved in their company’s retirement plans, they always wonder why the [pension plan] assets they can get aren’t part of the lifecycle funds [in their 401(k)s],” Finnegan said.
One argument against holding alternative investments is the higher fees they command, but some asset managers say they negotiate with outside managers for lower fees, using the asset size of their target-date holdings as leverage.
Not everyone believes the risk that these target-date funds are assuming is manageable, however. “The argument that tailoring these plans with exotic asset classes [to match pensions] is not something I’m 100% sure I go along with,” said John Ameriks, a
As an asset class, target-date funds hold $370 billion in assets, according to
