Senate Committee Pans Target-Date Mutual Funds
Kurt Brouwer October 28th, 2009
Many 401(k) plans use target-date (or lifecycle) mutual funds. A target-date fund is structured to embody a diversified portfolio for a person who plans to retire in a given year, say 2030. The longer the fund is from its ‘target date’ the more its asset mix will favor higher risk investments such as stocks. As a fund gets closer to its target date, the asset mix would supposedly be changed to reflect more conservative income investments. So, theoretically, a target-date 2030 fund would almost certainly have a much higher commitment to stocks than a target-date 2015 fund would.
This Bloomberg piece notes a Senate Committee report that paints an unflattering picture of this burgeoning group of funds:
Kohl Says Target-Date Funds May Present Conflicts of Interest (Bloomberg, October 28, 2009, Jeff Plungis and Margaret Collins)
Target-date mutual funds suffer from high fees, limited choices and potential conflicts of interest, a Senate committee was told today.
Ouch. I suspect this report is causing a few migraines in the marketing departments at the large mutual fund companies.
Employers who offer workers the funds as part of their 401(k)s retirement plans typically can’t choose the investment mix, according to a staff report delivered to the Senate Special Committee on Aging at a Washington hearing. Companies often are limited to the administrator’s own mutual-fund offerings, the report said.
…Target-date funds, also known as lifecycle funds, move money from riskier investments such as stocks to more conservative alternatives like bonds as an investor approaches retirement. Contributions have grown 98 percent since they were endorsed as a default option for employers by the 2006 Pension Protection Act, according to Morningstar Inc.
…Target-date funds labeled 2000 to 2010 lost an average 23 percent last year with some dropping as much as 41 percent, according to data compiled by Morningstar, the Chicago-based mutual-fund research company. The average 2050 fund declined 39 percent in 2008, while the Standard & Poor’s 500 Index fell 38 percent.
…More than $140 billion has flowed into target-date funds since 2007, and 96 percent of employers that offer automatic enrollment use them, the Senate report said…
Target-date funds certainly could be useful, but they may not make sense as a default option for 401(k) participants. A default investment option is the one that a retirement plan must put your contributions in if you have not actually made a selection from the plan’s menu of investment choices yourself.
- Investing , Mutual Funds , Personal Finance , Retirement
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