Target-Date Funds: The Default That Is Becoming the First Choice

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Target-Date Funds: The Default That Is Becoming the First Choice

Joel Kranc Sep 23, 2015

The Pension Protection Act

With employers automatically enrolling employees into DC plans, and with employees generally paying little attention to their investments, many plans (and the fund industry along with them) looked at ways to help plan participants reach their retirement goals and milestones. Rather than placing unaccounted for pension money into bond funds or funds with little future yield potential, DC plan administrators looked towards target-date funds (TDFs) as a best-case scenario.

TDFs: The New “It” Fund

Such funds also became part of a volatility management strategy whereby plan sponsors were looking to de-risk their portfolios (or give plan sponsors the ability to do so) and increase exposure to low-risk or liability hedging-type investments. Diversification was also part of the equation that would supposedly help soften the blow of a volatile equity market.

There are, of course, differences amongst TDFs. Some are slower to rebalance while others act quickly, each kind affecting the risk profile for the investor. The financial crisis exposed some of the risks of these ever-popular default funds. Some TDFs, with a 2010 target date for example, might have lost upwards of 30% to 40% of their value due to overexposure to equities. Also, many fund families use funds from their own lineups, treating investors the same no matter what their risk tolerances may be.

Still, the industry and growth of products shows no signs of letting up, especially given how volatile the markets have been since the Great Recession. BrightScope, a research firm that ranks 401(k) plans, says that more than $1.1 trillion is invested in TDFs, and they predict $2 trillion will be invested in them by 2020.

The Bottom Line

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