“Target date funds have been arguably the biggest newsmaker this decade in the defined contribution business,” notes John Rekenthaler, vice president of research and new product development at Morningstar, Inc. “They have moved from being new, relatively unknown investments, to holding more than $200 billion and being the cornerstone of many DC plans.” Even with the currently volatile market environment, Rekenthaler suggests that these funds will remain popular for good reason, since they are broadly diversified and helps investors avoid the syndrome of buying high, selling low. “For example,” he says, “many 401(k) investors loaded up on aggressive, growth-style mutual funds in 1999-2000, only to suffer steep losses in the 2001-2003 technology bear market. Target maturity funds held up much better.”
With their increasing popularity, Rekenthaler suggests advisors use the following criteria when measuring target date funds:
Logic. Does the fund offer sound rationales for its asset allocation and security selection policies? Do these policies stand the test of time? They might have seemed reasonable when first created, but are they logical today given the changes in markets, and updates in financial theory?