What You Need to Know
- A recent working paper found TDFs had suboptimal results for most investors.
- TDFs may need more scrutiny but can help investment outcomes for many people, Benz said.
Do target date funds need to be rethought? The Wall Street Journal this week reported on a recent study, circulated by the National Bureau of Economic Research, that argued that the funds produce suboptimal results for most investors.
In the working paper, the authors found that TDFs’ equity allocation in retirement was too low for most retirees.
Further, the authors stated that TDFs don’t take into account that two investors of similar age may have radically different retirement situations and need different portfolio allocations. Indeed, these differences could lead to a loss of 1.7% to 2.8% of purchasing power each year.
The Journal story and study prompted Christine Benz, personal finance director of Morningstar, to tweet:
Sigh. I'm not saying TD funds don't deserve scrutiny, but I can think of about 10,000 aspects of the finserv industry that are more worthy of criticism. These funds really simplify things/improve outcomes for a lot of people. #GoodBeatsPerfect https://t.co/nauTeUlqNb via @WSJ
— Christine Benz (@christine_benz) January 10, 2022
“Sigh. I’m not saying TD funds don’t deserve scrutiny, but I can think of about 10,000 aspects of the finserv industry that are more worthy of criticism. These funds really simplify things/improve outcomes for a lot of people.”
The tweet brought on an array of responses from across the retirement and financial advisor spectrum, with most echoing Benz’s support of TDFs.
Said Michael Finke, professor at The American College of Financial Services:
“I just read through the manuscript and the methods seem pretty obtuse. One aspect they don’t consider that @davidmblanchett and I have found from using @MorningstarInc risk tolerance assessments is that people get more risk-averse as they get older @SSRN https://papers.ssrn.com/sol3/papers.cfm?”
The authors of the research paper developed a machine-learning algorithm to solve for the optimal portfolio choices using a life cycle model.
Brian Allen @RetireAdviser1 noted:
“TDFs are under intense criticism because advisers want to sell managed accounts. It’s that simple. I have no doubt that the result will be higher fees and lower net returns for #401k participants.”
“I agree that there is often an ulterior motive in undermining them. And the problem is, the criticism sticks. People with little financial knowledge might come into the 401(k) allocation decision with the idea that these products are suspect and proceed to make kooky allocations.”
Jeff Ptak, who co-hosts the podcast The Long View with Benz, wrote: