By now, most of my regular readers know what I do not like in the world of financial products. The annuity galls me (a mix of insurance and mutual funds that doesn’t do either well), the ETF (which mimics the indexed mutual fund but allows you to trade it just like a stock and pay for the privilege of trading just like a stock) and any tool that gives you the impression that you can set it and forget it. There are others, but at the top of that list is the target-date fund.
The products are all hyped and re-hyped by the those that sell them as the easiest way to wealth. The belief that sales people from the world of finance care about your well-being or what is known as fiduciary responsibility, may be the biggest mistake the vast majority of us make. And the folks who make these mistakes are often wary of every other type of sales approach in every other facit of their lives.
So why, when it comes to target date funds do they simply believe the following: pick a date in the future and our mutual fund manager will adjust and readjust the underlying holdings of the account to protect your hard earned money, so, that when you retire, you will have a conservative allocation of funds that will serve you well into the future?
First off, why would you trust the promise of anyone who won’t be there in the future to take the blame if the promise is turns out to be not-so-accurate? Secondly, why trust any Wall Street product?
I often talk to friends and neighbors about their investments. And the topic always turns to where I think the market is headed. I am not a fan of answering a question with a question but this one always begs to be asked: why does it matter? If the market is headed higher, your regular weekly contribution to your 401(k) will keep you from putting too much money to work chasing a rising market and conversely, if the market is headed lower, you get more for less. This puts the breaks on doing some herd-mentality type of thing like buying high and selling low.
But they want to. In fact, most of the people who ask positively think they have to do something. These folks aren’t financially clueless so much as they fear being financially clueless.
But the real financially clueless among us do something other than worry about where the markets are headed or if there is something they could have done differently. They believe that there are people out there who know, who have their best interest at heart and react in kind and because of this misplaced trust, they invest in target date funds.
Now I mentioned that I have a problem with these funds. Among the many issues that these funds present is the hard sell. They are now present in virtually every 401(k) plan and in many, are the default investment for those who fail to join or do not know what to invest in once they do. About a third of the money currently in these defined contribution plans is directed towards these types of funds. Some folks reacted to the most recent market misstep by moving the shards of their portfolio into this type of investment.
Target date funds are slightly different than lifestyle funds. The lifestyle fund reflects your outlook and invests accordingly keeping an asset mix of conservative, moderate or aggressive investments in play. Target date funds move from risky to not-so-risky investments as you get closer to retirement. The assumption made by investors is that the professionals running these funds will do so without their need to monitor the progress, cost or even if they are doing what they promised.
Vanguard actually uses the following phrase to describe the sort of investor they think is most interested in this type of investment: “initial investors, not experienced or sophisticated investors” — people who may not want to think about their investments for as long as 45 years.”
The life cycle of the mutual fund manager is far shorter, almost gnat-like in terms of how long any one at the helm of a fund can be expected to stay in the lead position. But 45 years of doing whatever they please? It’s no wonder they don’t want the sophisticated investor to use this investment. They know better!
Aside from the personnel shift at the top, there are the fees. Layers of costs associated with the piles of funds inside are often overlooked by the investor looking to find a retirement date and doing not a finger’s worth of heavy lifting beyond that. The question of diversification comes into play as well. For a target date fund to work the way it supposed to work, you will need to allocate everything to one fund.
This according to the financial wonks in the know will keep you from the potential of cross-over investments (those investments that might be invested in the same thing and throw the whole asset allocation thing out-of-whack) and keep you from complaining that other funds in your portfolio have out-performed.
Sen. Herb Kohl, D-Wisc. has an idea that might change the way mutual fund companies sell this product. Make the legally liable for the outcome fo their fund. This would put the onus of responsibility where it belongs, on the fund company’s method for selling their product. This push towards fiduciary responsibility will keep financial advisors from selling something they don’t buy themselves but may, in the long run, not end the cluelessness it is trying to end. It simply pushes the blame on the next generation fo fund managers, who will claim they can’t be held responsible for their predecessor’s lies.
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