December 17, 2009

Target date funds overweight junk bonds

More bad news about target-date funds. That market grew to $311 billion last year, thanks in part to employers including them in automatic enrollment options for company-sponsored 401(k) plans. However, Bloomberg cites Morningstar data that shows six of the nine largest U.S. target-date fund providers by assets use junk bonds in their 2010 portfolios, and the U.S. default rate on these bonds was over 11 percent last month, according to Standard & Poor's.

The excessive use of junk bonds in these funds has earned the ire of some on Capitol Hill. Senator Herb Kohl said today he will introduce legislation that would require target-date fund managers to act as fiduciaries if their funds are offered as part of an automatic enrollment package in 401(k) plans.

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