Where did target-date funds fail?
Even though Target-date funds are considered a safer investment vehicle for retirement, these nest-eggs still lost much of their value when the economy tanked. Federal regulators are looking into why. Bob Moon reports.
More on Investing, Retirement - Saving
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Steve Chiotakis: You may've heard the term "target-date fund" being thrown around in the investment lexicon. That's a type of 401k account where things get a little more conservative the closer you get to your particular retirement date -- conservative as in safer. But some of those safer nest-eggs still lost much of their value when the economy tanked, and today federal regulators are holding a hearing in Washington to find out why. Here's Marketplace's Bob Moon:
Bob Moon: When a Senate committee looked at target funds for those retiring in 2010, it found widely varying exposure to stocks.
Mercer Bullard heads the advocacy group Fund Democracy. He says investors are being misled:
Mercer Bullard: If you call something a 2010 fund and create an expectation, it's not going to have more than about 50 percent in stocks. That's just wrong and you need to prohibit that from happening.
Vanguard, on the other hand, argues that retirement investors who don't go with target funds actually make riskier choices. And Vanguard's John Ameriks says whenever stocks fall as much as they did, some losses -- even in these funds -- are unavoidable:
John Ameriks: I think it's a leap -- a very big leap -- to assume that that means there will be no risk. Everything that's said about target-date funds emphasizes they're not guaranteed.
Ameriks insists target funds remain a fair and simple option for investors who need help diversifying. But Bullard complains there are no rules to limit how risky these funds can actually be:
Bullard: Which resulted in the defrauding of a lot of investors whose lives have been substantially changed -- and in some cases ruined.
Federal regulators say they're looking into whether more needs to be done to better align the make-up of these funds with the expectations of investors.
I'm Bob Moon for Marketplace.
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From san francisco, CA, 07/06/2009
I've listened to Market Place Money for years now & it is my favorite Public Radio Program.
I think the title "Where did target-date funds fail?" is a bit loaded, "Did target-date funds fail?" would have been more fair.
I agree others' proposals to add "aggressive", "moderate", or "conservative" adjectives to a given TDF would help investors and that an industry standard yardstick ought to be applied to communicate that risk. Perhaps the "120-age" rule of thumb for asset allocation for "aggressive" is a good place to start.
However in the big picture, TDFs did what they are supposed to do - take the long view and invest for the long run. They are designed to reduce (not eliminate risk) over time while protecting assets from inflation(a 20+ year retirement isn't - and won't be - uncommon!).
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