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Target-date mutual funds were supposed to lead a revolution in retirement savings. These funds, which automatically adjust their asset mix as an investor's retirement date approaches, were seen as a way for individual investors to achieve the discipline, diversity, and typically higher returns of pension funds. Now, 15 years after the first target-date fund launched, they are finally positioned to live up to their initial promise.
What took so long? One reason is that many funds didn't previously include the range of investments that have helped the traditional pension plan—that rapidly disappearing benefit—outperform the average 401(k) retirement savings plan. Commodities, emerging-markets stocks, and even private real estate are now being thrown into the mix”
In other words the mutual fund industry has been experimenting on your dime and you could have been investing for over a decade while the fund company figured out the “right” mix of assets. How one could have confidence that the funds are” ready to live up to their initial promise” is a mystery to me because the asset mix for funds with the same target date from different fund companies varies widely.
BW goes on:
“One key variable among the funds is the size of their equity stakes. Conventional wisdom once held that retirees should pare equities as they move into their 60s. But AllianceBernstein and T. Rowe Price argue that people need to invest more aggressively to make their nest eggs last longer. How much stock is enough? The typical pension fund is 65% invested in equities. A study by Watson Wyatt Worldwide shows that in target-date funds, equity allocations in the year of an investor's retirement range from 20% to 65%.”
Not only that, the fund companies have been changing their allocations within their target date funds:
International and emerging markets may be growing in your retirement portfolio, in a proportion sharply higher than when the funds opened:
“Target-date fund providers are also hiking their stakes in international equities. From 2005 to 2007 the international-equity weighting in these funds rose by as much as 7%, to a typical 17%. Managers say they want to capture a more accurate representation of global capital markets. T. Rowe Price broadened its international-equities position in target-date funds from 15% to 20% last November, beefing up investments in emerging markets such as Brazil, Russia, and China. “…AND
“Real estate holdings, another pension-fund staple, are popping up in more portfolios..“
AND
“Hedging strategies, long used in the institutional world, are also adding zest to target-date portfolios. Treasury inflation-protected securities (TIPS) and commodities have cropped up in a few target-date funds, including those offered by Fidelity and Principal Financial Group (PFG). Providers are mulling ways to invest in hedge funds and private equity, too.”
All the above leads one to wonder whether these are target date funds with a defined strategy for retirement savings or a license for the fund company to enter into whatever asset mix it sees as appropriate to maximize short term returns. What will these funds(and their investors) do if the investments in exotic emerging markets or commodities take a big tumble just as the target date approaches ? Are such volatile assets eliminated from the portfolio as the target date approaches ? I have yet to thoroughly research this issue but it seems that there are few explicit restrictions on the manager.
I wonder how much transparency is in these funds in terms of what they can hold, what their target allocations are and how often they can be changed. And it seems that there must be little in the way of tax management. What was peddled as a simple worry free form of retirement investing may be more of a potential problem than many investors think.
The Business Week article lists the % of Equity Holdings in the Target Date 2020 funds from several major fund companies. As you can see there is quite a range:
Alliance Bernstein: 80%
T Rowe Price 75.1%
Fidelity 69%
Vanguard 63%
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