This week’s Barron’s cover story glorifies Target-Date funds.
The idea behind the concept is that investors are simply too dumb to effectively manage their own retirement accounts. Buy a target-date fund, though, and one of the big investment managers like Fidelity, Vanguard or T. Rowe Price (TROW), will allocate your money between stocks, bonds and cash based on your projected retirement year.
The theory is that investors will be spared the pain of extreme bear markets via professional decision-making regarding distribution of 401k or IRA assets on the way to your golden years.
Barron’s noted that about 20% of all retirement plan assets are now held in target-date funds. With around $1 trillion in AUM there is big money in their management fees, which run much higher than those of plain vanilla index funds.
The market for these funds soared after the Pension Protection Act of 2006 allowed companies to automatically enroll employees in 401(k) plans. Many firms encouraged the use of target-date funds as the ‘default’ option since it lowered employers’ legal liability.
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Is limiting equity exposure a good idea for folks with many years left until retirement? History says “No.†Stocks are where the money has been made over the lifetimes of everyone working today.
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Did target date 2030 funds protect their investors from the carnage of 2008? The answer is once again, “No.†The five target-date funds that Barron’s favored pretty much matched the market’s plunge that year.
Have target-date funds performed well for investors over time? Barron’s top 5 showed average one-year and five-year total returns of 19.44% and 14.84% (annualized) in the period ended June 30, 2014. Those raw numbers sound good until you compare them to the S&P 500’s results over the same time frames.
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