The Incredible Unknown Risks of Target Date Funds

Target Date Funds originally sounded like an ideal, hands-off, approach for investors. Adjust the mix of securities in a fund automatically based on your age.

target date fund miss the target

Are you in your employer’s Target Date Fund option?

In 2008, many 2010 Target Date Funds lost close to 40%, causing those soon-to-retire investors to return to work. The lesson:  Retirement savers cannot trust their employers, the Department of Labor or the SEC to operate in their best interest. They worked together to makes these funds the “default options” in 401(k) plans.

One must take charge and choose their investments. Read the Department of Labor’s May 6, 2010 Alert to investors to learn more.

What’s In a Name?

Target Date Funds are designed to be long-term investments for individuals with particular retirement dates in mind. The name of the fund often refers to its investors’ target date for retirement. Names like “Portfolio 2030,” “Retirement Fund 2030,” or “Target 2030″ are designed for those who intend to retire in or near the year 2030.

The Risks

What seems like an easy decision to make – just put your money in a fund with everyone else who intends to retire when you do – doesn’t tell the whole story.

Did you know Target Date Funds:

  • Are typically the default option in an employer’s 401(k) plan, if an employee does not “Opt Out” to select their own retirement savings?
  • Have no disclosure standards?
  • Are structured in the best interest of Wall Street and not the retirement saver?
  • Can make changes in the fund without your approval even if those changes create more risk?
  • May have different investment results and may charge different fees, even with the same target date?
  • Often invest in other mutual funds, and fees may be charged by both the Target Date Fund and the other funds? Read the Department of Labor and SEC bulletin for details 

Check and see if you are in your employer’s 401(k) Target Date Fund option. Did you opt out of the default and choose your own investments based on the other options they offer? If not, you may be in a Target Date Fund and not even realize it.

*Source: 2008 Flaws in Modern Portfolio Theory, Hayworth Richard, September 2012
** Source: https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-target-date-fund-recommendation.pdf

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