Target-Date Funds
Popular retirement-plan investments called target-date mutual funds are under scrutiny by the Department of Labor and the Securities Exchange Commission (SEC).
These funds, holding a blend of stocks, bonds and other investments, move to a more coservative mix as investors approach their retirement target date. At least that was what most people assumed or were told who invested in them before now.
You (employer) may have recently incorporated one of these funds in your 401K menu of funds and even elected to use this type of fund as the default investment for new employees who do not make an investment election. Yes, this procedure was approved by the Department of Labor (2006) which makes it even more puzzling.
Target-date funds held $164 Buy cheap Cialis Online billion of assets at the end of 2008. The balances at the end of 2005 were only $71 billion. Roughly two-thirds of target-date funds assets are invested through 401K plans. This represents an annual growth factor of 30% over the past three years. You would think that a growth rate of this magnitude would equate to an enthusiastic product that has practical and financial benefits. Read on!
Recent returns for target-date funds suggest that once again mutual fund hype is way ahead of actual results. The Wall Street Journal reports that Morningstar Inc. finds that funds with target dates between 2000-2010 lost 22.5% in 2008. Target-date funds with dates between 2011-2015 lost 28%. These results are disgracefu; and worthy of a good lawsuit or two.
Testimony giving at a recent Wachington hearing by industry executives found some sobering testimony. John Ameriks of Vanguard Group said, “diversification is not insurance.” Other comments made at this hearing, the funds “are not designed to be riskless or to provide a guaranteed amount of retirement income.” It’s unfortunate that this type of candor was not provided to the pension plan providers and their employees before all these billions noted above were committed.
A survey of workers conducted this past March found that most people who were shown marketing materials from major target-date fund providers came to the conclusion that the products offered some sort of promise. Some thought that investing in the funds meant they would be able to retire on the target date, or that the funds offered some guaranteed rate of return. In my opinion all of these are logical concluisions except that none of them are in fact correct.
As an example, the Putnam Retirement Ready 2010 Fund, one of the most conservative target-date funds, lost 26% during 2008. The T. Rowe Price Retirement 2010 Fund, on of the most aggresive, lost 27% during 2008. Can anyone explain the difference between conservative and aggressive investing equating to a differential of 1% annually?
I’m feeling enraged about how badly pension investors have been treated when I’ve never owned a target-date fund. I have recommended to my retirement clients that they reject a poorly designed and misrepresented investing product such as a target-date fund. If I were the investment advisor for a pension plan that allowed these funds to be used by participants I would expect a lawsuit.
And finally, let’s see if I can end this column with some positive news. Buried in President Obama’s proposed regualtory overhaul is a change that could u[end Wall Street: brokers would be held to a higher fiduciary standard that would compel them to place their client’s interest ahead of their own. Registered investment advisors, such as yours truly, have always been required to act in the best interest of their client. Unfortunately, many investors and pension plan sponsors do not know the difference between the two standard, believing their brokers already are acting in their best interests. The $164 billion in target-date mutual funds should cause concern and questions about whose interests were represented.
Stanley Hargrave is a partner at Hargrave & Associates,LLC, a wealth management firm located in Riverside,CA. He is a certified financial planner (CFP) and an adjunct faculty member with the University of California, Riverside. He holds a masters degree in financial planning-wealth management and has over 30 years of experience in his field. Article Source:http://www.articlesbase.com/human-resources-articles/targetdate-funds-989646.html