|
 Industry
Insight from Fred Barstein
The Problem with Target Date Funds
THE 401(k)
INDUSTRY and everyone associated with it are not
the only ones looking for easy answers to today’s complex
problems.
We seem to have moved full
circle from stable value to proprietary mutual fund
platforms to open menus to proprietary target date funds
with the promise that each solution would lead to nirvana.
In a market that perhaps no one
except a Bill Gross could have predicted, everyone is now
searching for the elusive guaranteed income solution in and
outside the 401(k) plan.
So what is the right answer?
Before we can come to
a quick answer, it’s important to be sure that we are asking
the right questions and that we understand the problems with
the answers we had thought were right.
Proprietary target date funds,
especially some 2010 funds, have proven to be flawed.
At a recent industry conference,
the head of one of the large proprietary target providers
was asked how the 2010 funds could have performed so poorly
and what could be done in the future to make sure we do not
suffer the same problems again.
The high level executive said
that 2010 funds are not designed to have the investor take
all the money out in 2010 because, historically, many
investors left the money in the fund.
Another target date provider
claimed that it was not their fault because they did not
expect bonds to perform so badly.
Everyone realizes that money
managers make more money from equities which is certainly no
excuse for heavily investing participants in the market with
little time to recover.
Left to their own
devices, participants have little chance of making the right
investment decisions regardless of the quantity or quality
of education.
On line tools have mostly
failed.
Target date funds are crude
though efficient way to manage money but, as we have
learned, they can put the manager’s interest at odds with
the investor’s.
Putting all the money in stable
value and money market is not right for the vast majority of
people.
And though guaranteed income for
all sounds great, is it realistic?
So far, the answer has been no
with the collapse of many underwriters and poor adoption
rates.
For advisors, the 401(k) market has moved from selecting the
right product to instituting the right process to focusing
on the right outcome.
While record keepers and money managers provide the tools
and ingredients for a happy outcome, it’s the advisors who
are the chefs. Even
in an era of heightened concern about fees, we need to
realize that if advisors perform retail tasks, they should
be paid retail like fees.
Otherwise, every gets served lumpy mush and no one is
happy, especially many of the 2010 investors who thought
they were making safe bets.
If nothing else, the recent 2010 fiasco shows that
target date funds do not make advisors obsolete as many
target date providers would have had us believe, many of
them direct sold providers, coincidently.
Return to Newsletter |
|
 |
