More Proof Target Funds Good Retirement Solution

It's popular to bash target-date retirement funds, but count me out. I know they aren't perfect. But a new survey from the Transamerica Center for Retirement Studies is all the proof you should ever need that target retirement funds are one of the most positive additions to 401(k) plans in recent years.

The Asset Allocation Hurdle
In the Transamerica survey only about 30 percent of respondents who have an employer-provided retirement plan seem to have much confidence they understand asset allocation principles. Among workers who do not have access to an employer-provided plan, the confident contingent sinks to 15 percent; 3 percent say they know a "great deal" and 12 percent assert they know "quite a bit."

HOW MUCH DO YOU KNOW ABOUT ASSET ALLOCATION?

Source: Transamerica Center for Retirement Studies

Could the target-fund naysayers out there explain to me exactly what else we have going for us right now that can address what that chart is telling us. Seems to me the target date fund offered in a 401(k) is incredibly helpful for the 70 percent-85 percent who aren't confident about what to invest in. It's a heck of a lot better than what we know can happen when there isn't a target fund option: overloading in one fund, or company stock, or just letting the money sit in a GIC or stable value fund.

Don't tell me it's easy enough to figure out the asset allocation puzzle. What exactly is easy about a 401(k) plan that offers 12 different investment choices? That's in fact the median number of funds offered in plans, according to Hewitt. One of the biggest failures in the whole construct of the 401(k) is the idea that workers had the time, inclination, and yes, expertise, to figure out how to build a sophisticated well-diversified portfolio. The tragedy was that the explosion in fund offerings within 401(k)s occurred in the 1990s, right along with the biggest bull market. Everyone thought they were brilliant building their own multi-fund 401(k) portfolios. We weren't. At least most of us. We just had the brilliant good luck to be investing during an unprecedented bull market run.

Misplaced Criticism?
Morningstar's 2010 survey of Target-Date Funds (PDF) points out the disconnect between critics, and consumers who continued to pour money into target date funds in 2009.

The Critics:

The criticism has indeed been fierce. Throughout 2009, the Senate Special Committee on Aging raised concerns about target-date funds, ranging from critiques of their asset-allocation policies (specifically, that the funds held too much in stocks and high-yield bonds) to calls for greater disclosure, to arguments that target-date funds should be held to a higher fiduciary standard than other mutual funds. The Department of Labor and the SEC held a one-day hearing on target-date funds. This marked the first occasion in recent memory in which Washington held up a mutual fund category for public scrutiny. Several consulting and research firms have issued white papers taking target-date funds to task.

The Consumers:

Clearly, most target-date investors are either unaware of the attacks that were levied on their funds or heard the barbs but did not share the opinion. Investors' willingness to stick with target-date funds has led to stronger returns with target-date funds than with other mutual funds. Morningstar Investor Returns, which reflect the returns earned by cash flows in and out of funds each month, exceed total returns in all but one target-date category and exceed total returns from other types of mutual funds over the past three years.

Maybe this is one time where consumers do indeed know better. Sure, there are plenty of ways to tweak target-date funds to make them better. Starting with educating folks on the need to invest Through Retirement (the basis for most target fund allocations) and not just To the target retirement date.

Nor am I suggesting target-date funds are the best solution. If you're confident making asset allocation decisions, your plan probably offers at least 11 other funds you can mix and match to build your 401(k) portfolio. But for everyone else who doesn't want the heavy responsibility of managing asset allocation, target-date funds are a great solution.

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