What Are Those Target Date Funds in my 401(k) Plan?

Target Date Funds. They pop up everywhere now and you’ll probably find them in your own company’s 401(k) lineup. They’re easy, no-brainer choices. Just plunk down your money and trust the ‘glide’ to retirement. Rather like that Boeing 777 gliding slowing and gradually from 10,000 feet right down to the runway.

The idea here is to put more of our money in the really risky stuff when we’re young and gradually change the mix to the less risky stuff as we get older The premise: we have better odds of growing our money by retirement we’re told. Am I 48? Okay, I’m 65 in 17 years so I’ll choose the 2031 ‘Boeing Glide Path’ Target Date Fund.

That idea is seductive: 10 or 20 ‘expert’ money managers can guide that Boeing Behemoth and protect my money better than just leaving my money alone in investments that have proven to do well by themselves over time.

We know better. Success in choosing, changing and manipulating the stocks and bonds in any fund is a matter of pure luck. I guess folks think that if one money manager can’t do it, let’s trust 10 or 20 to do it. After all, I can’t be sure to win the jackpot on one slot, so I’ll spread out and play 10 or 20 slots at once!

Success in managing mutual funds by trading in an out of different investments is just plain, old gambling. It looks respectable. After all, these are ‘smart’ guys and gals who know lots about all those stocks and bonds. Since they live inside that ‘black box’ called Wall Street they know how to make money, no?

Really? One study1 evaluated 6996 mutual funds, ranking them against one another. They looked at those in the top 10% of best performers. How many stayed in the top 10 over 3 years? Only 132 funds. 1.8%.

How many stayed in the top 10 over 5 years? .0014%. That means 1 out of almost 7000 funds! That’s pretty stunning. And not encouraging.

Stop a minute and think about that. If you chose a mutual fund in your 401(k) it has almost no chance of getting into the top 10% of performers for 3 years and almost no chance to be in the top 10% over 5 years. Zip, zilch, nil, nada.

So, what does this have to do with those ‘Target Date Funds’ that show up in my 401(k) lineup?

Target date funds are really a lot of funds wrapped into one. Maybe 10 or 20 of those brilliant managers playing slots all in one package!

Another thing about Target Date Funds: they sure are expensive. They can soak up 1-2% of your money every year. $150 for every $10,000 in your retirement account can do real damage to your money over 30 years. And that’s on top of the normal costs we all have when we invest.

Besides, Target Date Funds don’t adjust to changing market conditions. 10 years ago not many folks had ‘emerging markets’ in many of their investments. Now emerging markets are growing dramatically, so you’d want to make sure you have more of those as the market grows. And that’s just one example of how Target Date Funds can't adjust to a changing world.

We think ‘Target Date’ funds represent a ‘Good Enough’ or ‘Suitability’ standard, not a client focused standard. Sure, they’re simple and no-brainer investments. But they’re loaded with fees and (not-so) lucky guessers. They’re not really thinking of what is absolutely best for you.

We know that a simple 60%/40% or 50%/50% mix of stocks and bonds held for many years offers much better odds for growing your money2. You really want to be in simple structured index funds, funds that don’t rely on a manager’s brilliance or special insight.

Do you want 20 brilliant people playing the slots? Better the proven results of patient waiting over time with simple structured and indexed choices. They’ll make the adjustments as time goes by, because the indexes adjust as the world changes. No ‘brilliant’ manager has to guess or pick stocks or time the market.

If you have a 401(k) and are puzzled with all those funds choices and are tempted to jump to a Target Date fund in confusion, ask us to help. We’d love to. We know from our own experience how dangerous all those sharp objects in the typical 401(k) plan can be.

Something we’ve done for friends, family and clients is to look at their 401(k) plan lineup, see which of those funds is closest to a stable structured index-type funds and help you chose a mix that reflects a solid plan. Just print out a copy of your 401(k) fund choices and fax or call us with the fund names. We’ll talk to you for a bit about your goals, do a bit of digging on the lineup in your plan and get back to you with some good ideas on how to sort out your 401(k) choices. No cost, no obligation, no charge. We might find, after all, the Target Date funds are the best of all the other possible choices in your 401(k) plan. But we might be able to suggest a better mix since many of the plans offer 8 or 10 other choices besides target date funds. In any case, we are happy to help.

Denise and I love to cook and sometimes spend an entire day on big menu for guests. So much to do. So much can go wrong. Too much complexity. So we’ve surprised ourselves with how much we appreciate the Slow Cooker. Pop in the ingredients and leave them alone for hours. Check once in a while, but just trust the slow cooking process will do the job. The results are always delicious, even with the most basic ingredients. Investing isn’t so different.

As always, nothing guarantees you won’t lose money. All investing has risks and you need to understand that before you put your money into stocks and bonds. Our hope it to help you increase the odds in your favor by doing what is best for you. It’s the same strategy and investments we use for our families, our clients and ourselves.

1Study done by fi360, the Center for Fiduciary Studies
2If you want to get into the tall grass, you can read “The False Promise of Target Date Funds” at http://www.etf.com/publications/journalofindexes/joi-articles/20762-the-false-promise-of-target-date-funds.html?showall=&fullart=1&

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For more information, contact
Michael Simone, MBA, AIF®
201.404.3303 | michael@eatoncambridge.com

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