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.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Walter Updegrave, Money Magazine senior editor

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.  To top of page

Send feedback to Money Magazine
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Royal wedding: How much will it cost? Meghan Markle's wedding to Prince Harry could cost millions once security is included in the bill. See how the costs break down. More
Robot co-workers? 7 cool technologies changing the way we work Experts believe humans and machines will work much more closely together. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play