Most questions you should ask yourself about your retirement you do not ask. It isn't because you don't have the question in hand. In many instances you do but you simply fail to seek the answer. For example: when would like to retire is much different that when will you retire. Both queries speak to the same time in your life when your current working career shifts into another realm. But the answers, like the questions, are different.
Target date funds, the darlings of the skittish post-2008 investor, the new-hire and the plan sponsor who believes they are doing the right thing by their employees, the funds that pick a date in the far-off distant future, a point in time when your retirement is supposed to happen don't answer the question the way we all assume. In fact, they may not answer it at all.
Target date funds are designed with, among the obvious pick-a-date moniker, an asset allocation shift over time. If you buy into a fund, such as one that picks 2040 or 2050 as a retirement date, you will have, at least according to the sales pitch, an aggressive to conservative journey spanning the next 30 to 40 years. The idea is that your fund will find the right investments to gradually ease you from being exposed to equities and the potential growth they offer to fixed income and the protection they offer over that time period.
So which fund do you pick if you can't or won't answer the either question? Imagine a 25-year old entering the workforce. They have the opportunity to pick a fund that reflects an investment arc spanning 40 years. Even if they don't understand how to invest or what to invest in, there is little likelihood that this employee will stick with this plan and this fund over that period. Few people buy any mutual fund and devote that sort of loyalty to a fund that almost predicts diminishing returns (all in the name of capital preservation).
As the worker ages, things change. Life happens and in the process, you become more educated, perhaps more risk tolerant (or averse), and you understand the markets better. This changes your investor approach to these funds. You begin to question their strategies, how they allocate the money you dutifully send each paycheck, and whether the fund is doing as advertised. And after all of that, you would have to aks yourself, when will I retire? And if I do, will I keep this fund?
Target date funds come with risks. Many of which are well-known even if they are not well understood. The Labor Department is looking to clear up this confusion for target date investors even if the information is already available - if under used.
Among those risks are disclosure of the fund's asset allocation. Depending on your time horizon, the fund you pick and how that mix of assets changes over time, every target date fund differs in their approach. Now keep in mind, most of us will encounter these funds in a 401(k) plan and have little ability to shop around for a target date fund that does better. Also keep in mind that "better" is a tough call. Any comparisons made between two similarly named funds ends right there.
The Labor Department would also like the the significance of the target date explained. Even the most novice of investors can grasp the target. What they can't wrap themselves around is the fund's investment policy. Few can and because of this, even fewer read this already published information. And what troubles the Labor Department the most about these funds, often given set-it-and-forget-it status in the minds of many of these investors is the inclusion of a including a statement that the fund could lose money - and it might happen close to retirement.
How could something so simple become so complicated? You pick a retirement year (simple) and the fund matures with you (simple) and because there are no guarantees (complicated) and no way of telling whether this is the right fund on the day you put your first dollar in it (even more complicated), how do you know?
Charles Jaffe of Marketwatch believes it is a "to or through" question. Will you have the fund at retirement invested as conservatively as possible or will you be keeping a couple of decades after you retire? Something this simple should be this complicated. The question is really to or through but "why bother"?
I have no problem with auto-enrollment of new hires. I have no problem with educating and offering these new employees some insight on how their 401(k) operates and what it offers. I do however have a problem with the perceived safety of the target date fund in the plan and the seemingly risk-free idea that this is a fund you keep even if the employee will not stay with the company - or that particular fund - forever or at least until that retirement date.
Making target date fund reporting more transparent as the Labor Department proposes is not going to make the task of choosing easier for those considering this type of fund or who have been auto-enrolled in one. Most mutual fund investors know that there is risk - some can even describe it. Most know that there are no guarantees. Yet target date funds seem to offer a false assurance that time is on your side in a way that is not so for other retirement investors. And that is a problem.
Target date funds, the darlings of the skittish post-2008 investor, the new-hire and the plan sponsor who believes they are doing the right thing by their employees, the funds that pick a date in the far-off distant future, a point in time when your retirement is supposed to happen don't answer the question the way we all assume. In fact, they may not answer it at all.
Target date funds are designed with, among the obvious pick-a-date moniker, an asset allocation shift over time. If you buy into a fund, such as one that picks 2040 or 2050 as a retirement date, you will have, at least according to the sales pitch, an aggressive to conservative journey spanning the next 30 to 40 years. The idea is that your fund will find the right investments to gradually ease you from being exposed to equities and the potential growth they offer to fixed income and the protection they offer over that time period.
So which fund do you pick if you can't or won't answer the either question? Imagine a 25-year old entering the workforce. They have the opportunity to pick a fund that reflects an investment arc spanning 40 years. Even if they don't understand how to invest or what to invest in, there is little likelihood that this employee will stick with this plan and this fund over that period. Few people buy any mutual fund and devote that sort of loyalty to a fund that almost predicts diminishing returns (all in the name of capital preservation).
As the worker ages, things change. Life happens and in the process, you become more educated, perhaps more risk tolerant (or averse), and you understand the markets better. This changes your investor approach to these funds. You begin to question their strategies, how they allocate the money you dutifully send each paycheck, and whether the fund is doing as advertised. And after all of that, you would have to aks yourself, when will I retire? And if I do, will I keep this fund?
Target date funds come with risks. Many of which are well-known even if they are not well understood. The Labor Department is looking to clear up this confusion for target date investors even if the information is already available - if under used.
Among those risks are disclosure of the fund's asset allocation. Depending on your time horizon, the fund you pick and how that mix of assets changes over time, every target date fund differs in their approach. Now keep in mind, most of us will encounter these funds in a 401(k) plan and have little ability to shop around for a target date fund that does better. Also keep in mind that "better" is a tough call. Any comparisons made between two similarly named funds ends right there.
The Labor Department would also like the the significance of the target date explained. Even the most novice of investors can grasp the target. What they can't wrap themselves around is the fund's investment policy. Few can and because of this, even fewer read this already published information. And what troubles the Labor Department the most about these funds, often given set-it-and-forget-it status in the minds of many of these investors is the inclusion of a including a statement that the fund could lose money - and it might happen close to retirement.
How could something so simple become so complicated? You pick a retirement year (simple) and the fund matures with you (simple) and because there are no guarantees (complicated) and no way of telling whether this is the right fund on the day you put your first dollar in it (even more complicated), how do you know?
Charles Jaffe of Marketwatch believes it is a "to or through" question. Will you have the fund at retirement invested as conservatively as possible or will you be keeping a couple of decades after you retire? Something this simple should be this complicated. The question is really to or through but "why bother"?
I have no problem with auto-enrollment of new hires. I have no problem with educating and offering these new employees some insight on how their 401(k) operates and what it offers. I do however have a problem with the perceived safety of the target date fund in the plan and the seemingly risk-free idea that this is a fund you keep even if the employee will not stay with the company - or that particular fund - forever or at least until that retirement date.
Making target date fund reporting more transparent as the Labor Department proposes is not going to make the task of choosing easier for those considering this type of fund or who have been auto-enrolled in one. Most mutual fund investors know that there is risk - some can even describe it. Most know that there are no guarantees. Yet target date funds seem to offer a false assurance that time is on your side in a way that is not so for other retirement investors. And that is a problem.
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