Keep Uncle Sam's hands off target-date funds
Sure, they're not perfect, but changes the feds are thinking about won't make them better.
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| Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005) |
(Money Magazine) -- Target-date funds, those all-in-one portfolios of stocks and bonds that are supposed to be age-appropriate, have become targets themselves lately. The charge: that they failed to protect older investors from last year's downturn.
One fund that has received a great deal of attention is Oppenheimer Transition 2010. Aimed at those nearing retirement, this portfolio went into the bear market with more than 60% in stocks, and lost 41% in 2008.
So now the federal government is stepping in. At the behest of Senate Special Committee on Aging chairman Herbert Kohl, the Securities and Exchange Commission and the Department of Labor held a hearing on these funds in June to determine if "additional guidance by either agency would be helpful."
There's little doubt about what chairman Kohl is really pushing for. When I spoke to the committee's target-date expert, it became clear that the preferred solution is to place a cap on the amount of stock that target-date funds are allowed to hold.
I'll be the first to admit that target funds - which are available in 77% of company retirement plans and are the default option in many 401(k)s - aren't the no-brainer investments they were made out to be. But many people are still far better off in them than investing on their own.
For one thing, target-date funds help keep investors from making extreme bets. Heading into last year's bear market, the average target-date fund geared to folks nearing retirement held roughly half its assets in equities.
Yet at the start of last year, over 40% of 401(k) participants 56 to 65 years old had 70% or more of their nest egg in stocks. And more than one in five had 90% or more. Their accounts would have held up better last year had they been in a target fund for someone their age. The average 2010 fund, for example, fell 23% - nowhere near the losses suffered by Oppenheimer 2010.
More important, where would Congress even set the cap on stock exposure? The level of stock that's appropriate for, say, a worker who doesn't earn much and will be relying mostly on Social Security will probably be much lower than what's suitable for someone who'll qualify for a generous traditional pension and is sitting on a large 401(k). That's why firms like Ibbotson Associates are creating customized target-date funds that take into account those specific factors. If the government dictates allocations, that sort of innovation could dry up.
I suggest that the feds concentrate their efforts where they might actually be helpful, starting with education. We need it: A recent survey showed that 38% of investors think target funds pay a guaranteed return.
The feds can also push for tools and calculators that will help companies and 401(k) participants understand how the funds might - emphasis on might - behave in different market conditions. The idea is to address not just how much the fund might drop in a crash, but longer-term considerations such as how a fund's mix can affect your eventual retirement income.
The bottom line: Uncle Sam should make it easier for you to evaluate whether your savings belong in a target-date fund, but he shouldn't be involved in setting the targets themselves. 
