Dog Bites Man! TDFs Fail Expectations

Despite criticism from regulators, equity allocations remain high

Target date funds, already the subject of controversy for failing to deliver promised returns, took another turn for the worse in 2011.

In a review of the product’s overall performance by SmartMoney, the periodical found that the average fund with four years to go until its target date declined 0.4% in 2011. This compares with a 2% gain for the S&P 500 and an 8% gain for the Barclays Capital Aggregate Bond Index.

An out-growth of the 2006 Pension Protection Act, target date funds have become popular in 401(k) and other pension plans as a default option for many investors. But they became a target of ire with regulators and politicians in the wake of the 2008 market crash, most notably for their heavy allocation to equities, something that SmartMoney says has not changed.

“Despite widespread criticism from regulators and lawmakers after 2008, the average fund nearing retirement today has 40% of its assets in stocks, down only three percentage points from 2008,” according to the story.

"We had a real 'stress test' in the first nine months of 2011, and the industry failed," Ron Surz, president of Target Date Solutions, told the publication. He added that the returns would have been much worse, but strong gains in the fourth quarter "bailed the industry out."

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