In this age of Amazon and Uber convenience, it’s tempting for many investors to take the “set it and forget it route” when it comes to retirement planning or tuition financing. In fact, defined contribution money managers reported a large jump in target-date assets under management to $1.44 trillion as of Dec. 31, up nearly 31 percent from the end of 2016, according to Pensions & Investments’ annual survey.
Whether you call them Target date funds (TDFs), life-cycle funds or age-based funds, the idea is simply to pick a fund that most closely matches your planned retirement date (say 2030), sock away as much as you possibly can while working and let the fund managers do the rest. Sounds nice in theory, but in reality it’s not so easy, as several of our clients have explained recently to the national media.
Dr. Guy Baker, founder of Wealth Teams Alliance (Irvine, CA) said TDFs have been especially impacted by low bond returns. Since the investor or manager has no ability to adjust the funds, a passive investor has been the victim of what is essentially an unmanaged market. “Over time,” said Baker, “the problem should sort itself out, but for older investors, investors counting on return to retire, the eventual recovery may be too late.”
James Nevers, CFP an advisor with our client Soundmark Wealth Management (Kirkland, WA), said a TDF is a great option for most young investors whose savings are nearly entirely in their companies’ 401(k) or other retirement plan. “The issues arise when other assets are factored in due to the non-static nature of the target date funds. For instance, if an investor is trying to maintain a 70/30 stock/bond allocation and has assets in multiple accounts (other IRA’s, taxable brokerage accounts, Roth IRAs, etc.) then the ever-changing allocation in the target date fund is not going to make it easier to maintain their level of risk,” added Nevers. He said TDFs do not make it easy to adjust your level of risk as your unique situation changes. “As long as you are invested in the fund, you are subject to the fund managers discretion on the allocation,” explained Nevers.
Dr. Baker agreed: “TDFs are best utilized by rank and file investors who are unwilling to engage the services of a financial advisor. The TDFs provide a reasonable substitute. For investors who are willing to work with an advisor, it is likely the advisor will provide value over the returns achieved by a passive strategy like TDFs,” added Baker.
If you are going to use TDFs, Nevers said it is your responsibility “to keep an eye on the underlying allocation and ensure that the allocation is specifically what you are looking for.“ Baker said investors can duplicate a TDF fund with a calibrated assortment of equity and fixed. “The problem is percentage allocation. How much should go into which funds? When do you recalibrate? What methodology is used to make these decisions? How much risk are you willing to buy in your portfolio?” posited Baker. That’s where a good advisor comes in.
# Target date funds # James Nevers #Guy Baker #asset allocation #risk tolerance