FRC: Target-Date Funds Still Niche Players

Target-date funds now hold just 4% of U.S. retirement plan assets, according to Financial Research Corp.

Lynette DeWitt, an analyst at FRC, Boston, has published a report on the target-date funds based on information in an FRC database and other organizations’ research.

DeWitt also interviewed 12 fund managers who manage a total of about $300 billion in target-date and target-risk fund assets.

The target-date fund asset total could increase to $880 billion in 2015, from $277 billion today, DeWitt estimates.

The asset total in target-risk funds could rise to $300 billion, from $187 billion, over the same period, DeWitt says.

But, even though mutual fund companies tend to market target-date funds as a total retirement solution, the funds likely will continue to hold just a small share of investors’ retirement assets, DeWitt says.

DeWitt, director of lifecycle fund research at FRC, warns that investors need to be careful about investing in target-date funds because of the funds’ lack of transparency.

“Many target-date fund providers are exceptionally vague about their products’ asset allocation,” says DeWitt. “Because the funds are focused on a future glide path, they minimize current allocation to the point where it’s difficult for the investor to understand what they’re currently invested in. Our advice for investors is to focus on the present–not the glide path. The present is the actual asset allocation today and how the fund fits in the overall portfolio.”