From the August 2009 issue of Boomer Market Advisor • Subscribe!

Target date tragedy

Given the shellacking they've recently taken, is it time to let target date retirement vehicles off the hook? That's the question Andrea Coombes asked earlier this month in the Wall Street Journal. Short answer (and not all that surprising) - No.

"Many managers say that focusing on a short-term event - In this case, the recent market collapse - is not the right way to approach these products. After all, they are aimed at long-term investors. Many of the funds that target a 2010 retirement date maintain a 50 percent or higher allocation to stocks, even long past investors' retirement date, because, managers say, that's the only way to make sure retirees' savings last and beat inflation throughout retirement, a period of about 20 years based on average life expectancy."

Fine, notes Coombes, but then goes on to make the following damning case against the product:

  • The five-biggest 2010 target-date funds lost an average of 29 percent from the start of the market's fall in mid-October 2007 through March 9 of this year.
  • Even with the recent market upswing, investors are a long way from getting back to where they were. Those five-largest 2010 funds are still down 16 percent on average for the year ended June 30, and who knows which way the market will turn next?
  • The results are even worse for those invested in funds with a longer-term outlook. The five-largest 2040 funds are down an average of 26 percent for the one-year period ended June 30, though at least those savers have more time to make up the shortfall.
  • Not all target-date funds invest alike. In fact, that's a major problem with them - Take any two 2010 target-date funds and you may find one is 20 percent in stocks and the other is 55 percent in stocks. That makes a world of difference for someone retiring in 2010.

For all the recent attention they've received, target date products are a relatively new product. Clearly there are bugs still left to work out.

As Dallas Salisbury, president of the Employee Benefit Research Institute notes in the piece, "The industry has no consensus on what the problems are or if there are problems. If the industry can't agree on any of that, the obvious answer is, 'If I don't think there's a problem, I'm not taking care of it.'"

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