Retirement Planning: What's Next For Target Date Funds?

What should become of target date funds? These are the so-called set-it-and-forget-it funds that are gaining in popularity, particularly since the Pension and Protection Act designated them as Qualified Default Investment Alternatives (QDIAs) for defined contribution plans. But the global financial crisis has shown that target date funds have shortcomings: the typical 2010 target date fund lost more than 20% in 2008.

A joint hearing held by the Securities and Exchange Commission (SEC) and Department of Labor (DOL) in mid June explored what sorts of changes target date funds may need to undergo. Anne Lester, portfolio manager for J.P. Morgan SmartRetirement Funds, says that during the hearing, the DOL and SEC “put their finger on what we think is the absolute most critical factor when talking about target date funds, which is what happens at the end” of the fund’s glide path. That is, does the glide path go “to” retirement or “through” retirement?

As Ron Surz, principal of Target Date Analytics in San Clemente, California, notes, “the distinction between ‘to’ and ‘through’ funds needs to be recognized, and fund companies need to clearly label their products accordingly.” Surz says the SEC may be mulling requiring fuller disclosure about the intent and purpose of individual target funds, which could include name changes. For instance, the so-called “to” funds are designed to end at the target date, Surz says, “and might be called ‘accumulation-only’ funds.” While “through” funds are “designed to continue beyond target date, potentially to death, and might be called ‘Target Death’ or ‘Lifetime’ funds.” Some industry officials opine that the target date in a lifetime fund should be year of birth, Surz says. The idea, Surz says, “is that the end date in ‘through’ funds is unknowable.” Most see the DOL as providing some sort of guideline, perhaps regarding asset allocation and distinguishing between ‘to’ and ‘through.’”