Target-Date Funds Often Miss Their Mark

An article in The Dallas Morning News warns investors against the wide discrepancies in the glide paths, or asset allocations, of target-date funds. As a result of too much risk, it says, some target-date funds are “missing the bull’s-eye.”

“The results of excessive risk can be devastating for those on the brink of retirement,” said Sen. Herb Kohl (D-Wis.), chairman of the Senate Special Committee on Aging. He notes how one 2010 target-date fund lost 41% of its value in 2008 and that the equity exposure of 2010 target-date funds ranged from 8% to 68%.

A benchmark 2010 target-date index that Dow Jones created has equity exposure of 27%, Kohl said. “Despite this, a number of large investment firms have equity holdings well over 50%,” he said, “exposing employees to excessive risk and, ultimately, huge financial losses.”

In a recent speech, Securities and Exchange Commission Chairman Mary Schapiro noted how the average 2010 target-date fund fell nearly 25% in 2008.

And thanks to the Pension Protection Act of 2006, more employers feel comfortable offering target-date funds as default investments in their 401(k)s, helping assets increase from $66 billion at the end of 2005 to $178 billion in 2007.

“More than 60% of employers now use target-date funds as a default contribution option, compared with just 5% in 2005,” Schapiro said.

One of the key problems with target-date funds is that they assume everyone in a particular five-year age range has the same risk tolerance. In addition, as people age, they have additional responsibilities and needs.