Abstract
This article examines briefly the performance and composition of “shorter-dated” target date (TD) funds, defined by the author as those intended for participants within a dozen years of, or already in, retirement, using data provided by Morningstar. Such funds performed worse in the severe crunch of 2008 – far worse in some cases – than investors were likely expecting. This is now widely recognized. More importantly – and disturbingly – shorter dated TD funds remain too aggressively invested in most cases, delivering performance (and exhibiting risk), on average, in line with pension funds. Meanwhile, longer-dated TD funds (>2030) behave mostly like all-equity portfolios.Since pension funds likely have a longer-term investment horizon than most shorter dated TD fund investors, the average shorter-dated TD fund is almost certainly more aggressively invested than the average near-retiree/retiree can tolerate. At the same time, longer-dated funds may be under-diversified. However unlikely the prospect of a substantial stock decline may seem at present, the potential for large stock losses remains. The next bear market will make retirement unattainable, permanently, for many. A quick survey of shorter-dated TD funds reveals that there are disappointingly few choices for investors at or in retirement and seeking a relatively conservative TD option. Plan sponsors should consider alternatives, such as custom TD funds, when the shorter-dated TD fund component of a TD fund manager's offerings exhibit pension-fund like risk and return.
Published Version
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