It’s something Jeff Holt has said for years. 401k plan advisors and sponsors are all too happy to place participants in top performing target date funds, blissfully unaware (sometimes by design) of the underlying fund allocation, let alone the chemical makeup of the investments within those funds.
“We looked into exactly what was in the equity and bond allocations,” Holt, TDF fund analyst with Morningstar, explained a while back. “What was the ratio of domestic to international equities, what about corporates versus TIPS, that sort of thing?”
He emphasized that it is incredibly important for plan sponsors and retirement plan advisors to know what the specific allocations consist of.
“You can’t go completely passive in target date funds because managers still have to make active decisions about allocations, regardless,” Holt added. “This is especially true now that the DOL has increased scrutiny as they attract more and more assets. It’s more important for plan sponsors and retirement plan advisors to really know what’s in them.”
Now the Center for Retirement Research at Boston College took a closer look “under the hood” in its January issue brief to see what some people might be missing with target date funds. The authors note that “while nearly 60 percent of new 401(k) participants have savings in target date funds, little research has looked under the hood of this investment vehicle.”
They point to recent studies that found “by 2014, nearly 20 percent of all 401(k) assets were in target date fundstarget date , and about half of participants held these funds.”
The results? Target date funds:
- often invest in specialized assets (e.g., emerging markets and real estate);
- charge fees that are only modestly higher than if an individual investor assembled a similar portfolio on his own; and
- earn returns that are broadly in line with other mutual funds.
As with Holt’s analysis, the conclusions reinforce the need for due diligence on the part of 401(k) advisors, and education in target date fund design and execution for plan sponsors and participants.
Assets in target-date mutual funds topped $880 billion by the end of 2016, according to Morningstar. That’s up from $763 billion at the end of 2015. This growth came from “both investors putting more money in the funds and the positive returns 401k participants were able to realize.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
This was a very elementary 1st grade type article… really? For a trade publication? What the Morningstar professional should have been asking is what correlations do the assets allocations have when a bear market comes again! We have not seen one since early March, 2009. Every 2010 fund Morn* covers lost about 25% on average, with a low of 20% and a high of 34-35% in 2008. What does Morn* say to that? Buy and hold and hope?