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Peter Mallouk: Target Date Funds a ‘Terrible Choice’ for Most Investors

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What You Need to Know

  • Creative Planning's Peter Mallouk created a Twitter storm by dissing target date funds.
  • Investors should allocate assets based on their goals, not their age, he says.
  • While some of his followers agreed, others argued that TDFs are a good, if imperfect, option for investors with little experience.

Creative Planning CEO Peter Mallouk threw down the gauntlet Wednesday when he tweeted that although target date funds are popular investment vehicles in 401(k)s, “That’s unfortunate because they’re a terrible choice for most people.”

He added that asset allocations should be based not on one’s age, but on one’s goals.

“What’s bad (much worse than I think most realize),” he stated in a later tweet, “is using age to choose a broad allocation and ending up with much larger allocation to bonds than the appropriate target. Hinders goals.”

But his TDF slam then set his Twitter feed abuzz.

“The majority of US investors will do just fine investing retirement savings in low-cost target date funds from Vanguard or Fidelity,” fintech consultant Bill Winterberg replied. “They don’t need to be shamed for doing it.”

To which Mallouk responded, “No one is shaming anyone. I applaud anyone investing in their 401(k) and taking advantage of a match, tax free growth and compounding. I also want to help them make better decisions with their money. There are better choices.”

Others jumped into the fray. “If I’m following your responses correctly, you seem to be saying they’re actually a pretty good option, just not the best,” user @NateRothstein tweeted.  “Specifically b/c they tend to allocate to bonds vs. equity than they should in the current environment.”

Mallouk responded: “Yes, but the over-allocation to bonds is far more detrimental to the participant’s goals than most realize.”

Mallouk noted: “What I do like about them is the ‘set it and forget it’ part and low cost (usually). But the investment mix itself is far too often not a great fit.”

Regarding the age goal, user @StolpyStolps tweeted: “Sure, but most people don’t have the knowledge base required to translate a their goals into a proper allocation. Obviously age is a mediocre proxy for a person’s total financial picture, but it’s at least a start and better than the average person would do on their own.”

To which Mallouk stated, “Better than many alternatives yes. Investing in expensive mutual funds is better than not investing at all, but that doesn’t preclude us from recommending something better.”

Advisor Rick Ferri chimed in that TDFs “may not be perfect, but they sure as heck beat paying an advisor a stupidly high 1% AUM fee to unsuccessfully attempt to beat the market.”

Others pointed out that there are some TDFs with relatively low management fees.

User @timothyjquillin tweeted to Mallouk, “If you really believe this, you haven’t spent enough time in the real world speaking to 401k participants. But if your goal is to make controversial statements to drive engagement, mission accomplished.”

Mallouk responded: “I really believe this, I’ve personally sat across the table from over 1,000 401k participants, and I actively recommend risk based funds over age based funds. Nothing controversial about it. Investing based on age creates inappropriate allocations for many.”

@timothyjquillin responded: “I’ve also sat across the table from countless 401k participants and helped clean up inappropriate target risk allocations. Don’t say target date funds are a “terrible choice” for most people. You are influential and that is the wrong message. Focus on increasing savings rates.”

On Thursday, Mallouk posted a thread summarizing his reasoning: People have different income needs and a variety of outside income, including from Social Security benefits, pensions, retail properties or other investments. Also, life expectancy differs. He noted that a TDF assumes everything is equal, when it’s not.

His goal is to educate people as oppose to putting them into TDFs. For example, he states, “Some don’t realize costs matter. The goal is to help them understand why lower cost funds tend to perform better.” And some don’t understand risks.

“The goal is for them to learn how they can make their portfolio better suit their needs, not to throw our hands up and say ‘they will never get it.’”

He added that “To optimize, an investor should put the odds in their favor by investing as much as they can in their 401(k)s as early as possible, choose very low cost over very high cost where possible, and choose a few indexes or a risk based fund over a TDF.”