If you’ve heard anything about target-date funds recently, it probably wasn’t too complimentary. After the 2008/2009 market downturn, target-date funds received a lot of press about their failure to protect investors, specifically those nearing retirement. For those who don’t know these funds, they are the “set it and forget it” version of a mutual fund. You choose your retirement date and the fund is managed with that end date in mind – asset allocation becomes less aggressive as the investor nears retirement. These funds got a big boost with the passage of 2006’s Pension Protection Act, which allows employers to automatically enroll employees in qualified default investment vehicles in retirement plans – for which target-date funds are a popular option.
All in all, the funds are doing well in the marketplace – a recent study from Morningstar found that target-date funds still earn better returns than other options for retirement investors. Assets have grown from $69 billion in 2005 to $256 billion in 2009. But, most media coverage of target-date funds has an underlying assertion of their “problems,” perhaps fueled by Senator Herb Kohl’s consistent criticism and pending regulations from the SEC and Department of Labor stemming from a joint hearing held in June 2009.
Part of the reputation problem is that while target-date funds all have a similar investing premise, their underlying investments, strategy and asset allocations vary widely. So even though the funds may go by the same descriptor, each manager brings a different investment philosophy to their fund which can lead to varying returns.
So what needs to happen for these funds to “lose the asterisk?”
- Time needs to pass so investors can regain trust in mutual funds overall. Target-date funds need to lengthen track records and prove their value in a positive market environment.
- The SEC/DoL needs to either pass or not pass pending regulations, and then put the debate behind them.
- Short term, the funds need to do a better job of explaining their strategies so investors know what they are buying. While these funds are supposed to need minimal investor involvement, and are often a decision made by an employer, it’s still important that fund companies clarify what these decisions mean for retirement savings.
But in the end, these funds are here to stay. Americans need easy options to help them save for retirement, and target-date funds fit the bill.
*BlissPR is familiar with this subject matter as we work with a target-date fund manager.
To reach Katherine: