Fund Commentary with Steve Schoepke
Maybe Too Good to be True, All the Time
(Part 1)
Many 401(k) Plans began offering Target-Dated Funds over the last few years. The idea is an attractive one to Plan Sponsors, employee Participants, and the fund companies offering them. In the next series of articles, I will describe what Target-Dated Funds are and why they have become so popular. I will also outline some of the things that retirement investors who use them as their 401(k) choice should be aware of. One interesting aspect of these Funds, is that while designed to make everyone's life 401(k) "life" easier, this is not always the case.
To begin at the beginning, Target-Dated Funds are mutual funds that invest in other mutual funds just like "fund-of-funds" do. As its name implies, Target-Dated Funds have a specific year/date toward which investors are saving for a particular goal. In the case of 401(k) Target-Dated Fund choices, employees typically select the fund closest to the calendar year in which they expect to retire, although that need not be. In fact, Target-Dated Funds are usually pegged to 5-year increments, that is, 2010, 2015, 2020, and so forth. In addition, investors are able to use Target-Dated Funds outside their 401(k) Plans, for other reasons such as saving for college, home purchase, etc. That said, Target-Dated Funds are used most often in 401(k) and other similar retirement savings plans.
Sounds like a good deal for everyone, doesn't it? Target-Dated Funds do all the heavy lifting for the 401(k) Participant. i.e., the employee, who generally is ill-prepared and often has no interest in making fund choices for their retirement plan account. So the employee need only select the Target-Dated Fund that most closely matches their anticipated retirement year. For the employer or Plan Sponsor, Target-Dated Funds also solve the problem of offering employees a sense of retirement saving 'security'. Rather than just dumping a fancy, but complex 401(k) plan with a bunch of fund choices on employees, employers can offer a simplified "one-stop" alternative, where fund selection and all asset allocation decisions are included - no more employee complaints and lawsuits. Finally, for the fund companies offering Target-Dated Funds, they are the proverbial "cash-cow", with extra fees for managing the fund-of-fund underlying selections and allocations. Moreover, the money sticks, at least until the target date.
Unfortunately, all is not ideal, as was painfully seen during the last year. Markets can foul things up, as they did in a big way. Plan Sponsors, Participants, regulators, and even Congress are now wondering whether too much was promised. In the next article of this series, I will look into those promises.
Steve A. Schoepke, Director of Research for Financial Research & Analysis Associates, a New York-based investment and mutual fund research firm.
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