Target Date Funds Carry Greater Risks and Cost More: Why is the Department of Labor Allowing Them?

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Target Date Funds are the default option in your 401(k) or 403(b) account.

Here are a few definitions to get started on this Blog Post:

Target Date Fund: “The funds generally are set up so that investors can put their entire nest egg into a single one linked to the year they expect to retire, in effect putting a savings strategy on autopilot,” as the Wall Street Journal reported in “Missing the Target” on June 14, 2013.

Default Option: Many employees are not aware that if they do not sign up for their 401k or “Opt Out”, their employer will automatically deduct from their paycheck for their retirement savings. Where does your hard-earned money go? Into a highly risky, very expensive, unproven Target Date Fund approved by the SEC and Department of Labor. Why would regulators do that? Wall Street convinced them to.  Here are the risks and solutions as reported by the SEC Investor Advisory Committee.

Simplicity for Retirement Investors: The government likes them because they are simple for investors. Just put your money in one spot. One can do the same at Not On My Nickel education. Learn how to compare what is in your best interest with Not On My Nickel education. There is a comparison below on what you are losing out on by allowing these default options, but first a few more definitions.

Not On My Nickel: A revolutionary retirement research and education service that engages retirement savers to take control of their retirement savings through choosing, on their own, one or two mutual funds.  Not On My Nickel provides ongoing monthly research and education on these funds for the investor. What is the difference between most Target Funds and Not on My Nickel researched funds?  Not On My Nickel researched mutual funds carry less risk, significantly lower fees and proven portfolio manager performance that outperforms indices. It is simple, easy and much more conservative than a Target Date Fund.

Regulatory Capture: The influence of big-monied lobbyists on our nation’s financial services regulators, on behalf of the financial services industry.

Government Oversight: The Department of Labor knows these funds are fatally flawed, but Wall Street likes them. That is what is called regulatory capture. Wall Street determines the investments that go into the Fund. The more assets in the Funds, the more the financial services firms make.

Who Wins: Wall Street- Target Date Funds generate significantly more fees for financial services firms. Take a look at what the holdings are in the State Street 2030 LifePath Index Target Date Fund in the Chart on the lower left:

Screen Shot 2013-07-30 at 3.46.35 AM

Asset manager, BlackRock wins in this case. You will note that most of the holdings in this Target Date Fund, State Farm Life Path 2030 are Blackrock ETF’s or IShares. Who is the lead advisor to State Farm on this Target Date Fund? Blackrock’s Amy Whiteslaw, the Director of Blackrock Institutional Trust Company. Ms. Whiteslaw is one of the Portfolio Managers for State Farm, with an employment history of designing defined compensation plan holdings.  No conflict there?

The unlucky retirement investors that have been placed in the State Farm 2030 Life Path Fund or the TIAA-CREF 2030 Index Fund or TIAA-CREF 2030 Target Date Fund are losing due to higher fees and poor performance compared to Not On My Nickel researched funds.  These retirement investors now have a choice.  Not On My Nickel research and education provides the tools every retirement investor needs to take charge and invest in a few easy steps on your own.

Power of Compounding: The longer you wait to take action the greater you lose. See what waiting costs you at this compounding calculator at the SEC website.

As the Wall Street Journal reported: “Target-date funds, which are often composed of separate underlying funds, also carry widely disparate fees, and higher-cost funds can cut into investor returns. Some of these underlying funds passively track indexes, while others actively try to beat the market—an approach that can push fees up and lead to diverging performance.”

Here is a comparison between the performance of three Target Funds and a NOMN researched fund for your retirement savings.  One can easily select the NOMN researched balanced fund and invest in it, in place of a Target Date Fund. This is accomplished through your 401(k) Brokerage Window or your IRA.  The comparison is compelling.  Less fees, proven performance, less risk…what are you waiting for!  Screen Shot 2013-07-30 at 5.00.16 AM

The green line is a core Balanced Fund (PRWCX) researched by Not On My Nickel. It has proven performance, lower fees and less risk compared to the State Farm 2030 Life Path NLHAX, represented by the Blue Line and TIAA Cref (TCLNX), red line, Target Date 2030 Fund or TIAA Cref 2030 Index Fund (TLHIX), purple line.

The State Farm Target Date has an Expense Ratio of 1.6%, Brokers get paid .25% (12b-1) fee each year (!) for selling it to you and you pay the stockbroker or financial planner a 5% load to buy it!

What are you waiting for. Take action and move out of your default option. Remember the power of compounding.  Next week’s Blog will show you how much you are losing in Target Date Funds, such as this State Farm one, designed by BlackRock.


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