A column in The Wall Street Journal citing research circulated by the National Bureau of Economic Research criticizes target date funds’ one-size-fits-all approach.
Author Mark Hulbert’s gripe is that glidepaths consider too few variables, something reflected in the research.
“Many assume that the proper glide path for a target-date fund is a simple matter of extrapolating historical return and volatility data into the future,” he writes. “In fact, however, dozens of additional factors are relevant when determining whether a given glide path is optimal for a particular investor.”
He then describes an expanded view of sequence of returns—or the risk of retiring into a down market where assets are withdrawn at lower valuations for living expenses and therefore unavailable for an eventual rebound. A potential reduction in income from a job loss, in addition to portfolio assets, must be considered, something current glidepaths fail to do effectively.
“Thus, determining proper investment allocations needs to take into account not just the stock market’s historical return profile but also your age and the vulnerability of your job to the business cycle,” Hulbert adds. “That is difficult enough with just a few variables, but becomes almost impossibly complex when incorporating many additional factors.”
Critics counter
While not perfect, some critics countered target-date funds are adequate for most savers and better than the do-it-yourself allocation and rebalancing alternative. Others claimed the criticism stems from a desire on the part of advisors to use more expensive managed accounts.
“Sigh. I’m not saying TD funds don’t deserve scrutiny, but I can think of about 10,000 aspects of the finserv industry that are more worthy of criticism. These funds really simplify things/improve outcomes for a lot of people,” Morningstar’s Director of Personal Finance Christine Benz tweeted.
“TDFs are under intense criticism because advisers want to sell managed accounts,” Certified Financial Planner Brian Allen, Founder and Chairman of Pension Consultants, tweeted in response.
Bob Seawright, producer of the popular Better Letter weekly e-newsletter, reinforced the imperfect but better-than-nothing argument, noting that exercising also has risks but is certainly preferable to not exercising. It’s a point Hulbert eventually concedes, quoting researcher Jonathan Parker, a professor at the Massachusetts Institute of Technology.
“In any case, Prof. Parker hopes that this new study will not be interpreted as being overly critical of target-date funds,” he concludes. “He says that these funds represented a big improvement over what came before. The point of this new research is that ‘we can do a lot better. It can’t be optimal to be average.'”