Target Date Funds...As I Was Saying

In my last post on July 10 I commented on the problems with target funds. An article in the July 13 NYT reinforced my points with some additional information. The pitfalls are particularly important because, as noted below, target date funds will be used as the “default option” for 401k participations that do not make asset allocation choices. And it is usually the case that only one fund family’s target date fund is offered (almost always that of the company administering the plan) locking the participant into a particular fee structure and allocation. More from the nyt below(my bolds)

“A new study has found a striking lack of consensus about how the funds should operate, leaving employees and retirees exposed to widely varying levels of risk. The fees that the funds charge vary widely, too.
Although target-date funds have won a special blessing from the government as a safe place for companies to put workers’ 401(k) money, the industry has no solid indexes or guidelines for assessing their performance. That means a worker who wanted to check on his target-date fund may have some difficulty assessing it. While research exists on various funds’ history, there is no accepted benchmark for comparison and no agreement on what constitutes success, wealth preservation or high returns.
Despite a lack of consensus about the funds, they have attracted a flood of money. ….
The study analyzed all 38 of the target-date funds on the market at the end of 2007. All of the funds offered younger workers a portfolio weighted toward stocks, gradually shifting toward a greater share of fixed-income instruments, like bonds, as the workers aged.

Beyond that, however, there was no agreement about how fast this shift should occur, or about the best asset allocation when a participant reached the all-important “target date,” usually assumed to be age 65. Some funds would be 65 percent invested in stocks on the target date, while the stock total for other funds might be just 10 percent. The funds also differed on what they expected investors to do with their money after their target dates.

The rate at which the funds changed their asset allocations over time — a crucial formulation known in the industry as a “glide path” — also varied greatly. Some funds’ glide paths were flat, others steep. The annual fees they charged ranged from 0.21 percent, the average charged by the Vanguard Group’s family of target-date funds, to 1.40 percent, the average charged by the Payden/Wilshire Longevity Funds family of funds.