Timing is everything. This piece on target-date funds was submitted on January 26, 2009 and accepted for publication by a leading online site.Unfortunately, it wasn’t published in a timely fashion, and after the Wall Street Journal did an article on the funds in early March, it was determined that this would be redundant. This is the (unedited) second version I submitted.
Way Off Target
By Tom Brakke, CFATarget-date mutual funds have been one of the hottest investment products ofthe last decade. Also commonly called “lifecycle” funds, they are sold as aconvenient way for clients to meet their financial goals for retirement—onedecision by the client (buy the fund) and the investment manager does the rest.The mix of assets migrates along a predetermined “glide path” that reduces theamount of risky assets over time.The basic theory makes sense: Investors should take higher risks when they areyounger—when there is time to rebound from any bad years in the market—andpull in their horns as they approach retirement age. As a result, target-date fundsare gaining wide use within defined contribution plans such as 401(k)s and403(b)s, and are increasingly popular in IRAs as well.Introduced just fifteen years ago, the funds are still a small part of most plans andrepresented only 3% of the total assets in defined contribution plans as of June30. But the growth of late has been stunning, withassetsincreasing more than60% a year for the five years through 2007. Last year’s market decline will put adent in that growth rate, but the target-date funds are positioned to thrive goingforward.Reeling from a decline in business in other areas, mutual fund companies willredouble their efforts to promote target-date funds, and the wind will be at theirback due to structural changes at many defined contribution plans. Historically,participants in those plans have tended to repeat a few common investmentmistakes, including borrowing against their funds in non-emergency situations,taking on too much risk in theircompany’s stock, and keeping a large portion oftheir assets in low-yielding stable value funds (which are now under scrutiny foran entirely differentreason).