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What We’ve Learned About Target-Date Funds, 10 Years Later
@Jerry- Well, I started to put together a summary for you, but realized that the article is so long and detailed that it wasn't possible to do that without really violating their material.
Essentially the article gives a detailed description and history of TD funds, and relates how some investors evidently thought that such funds somehow provided a good degree of safety from capital loss, especially as the funds neared maturity.
The report also gives a typically balanced set of opinions pro and con on whether or not these funds are suitable for everyone (of course not), and discusses some of the available options and alternatives.
I realize that this is a pretty poor overview of the article, but sometimes an accurate short summary of a long report isn't really feasible. ( Just ask Attorney General William P. Barr about that.)
It’s better to google the exact passage that’s been cut and pasted here (without proper punctuation and attribution). That’s because editors often alter the title from one publication to another. But the text should remain mostly unchanged.
Well, we seem to have hashed and rehashed target date funds over the past couple years. No two are the same - nor do they claim to be. What’s in a name? Very little. Best to read and understand the prospectus, look at how the fund is currently allocated and than do your own analysis of how you’d expect it to perform. Very few here appear to use them.
Admittedly, many are sold to investors with limited financial knowledge or experience. But given regular contributions and enough years left untouched, virtually all these funds should profit the individual better than had he / she stashed the money under the mattress or in a low yielding savings account. Since many are bought within a workplace plan, let us hope the employer has done his homework and acted in good faith on the part of the employees. It’s important to use funds with lower fees.
@Derf - Great article. Please come to the front of the class!
I hadn’t heard the trim “target risk fund” before this. But they make good sense. With target date funds you’re making a lot of assumptions about the future. What will your situation be 20 years down the road? What will your home and other acquired assets be worth than? Your health and family situation? Will you still feel like working than?
Target risk funds attempt to maintain a static level of risk suitable for current situation. I’m reminded of a series of funds Oppenheimer offers. They have a series of four or five ranging from asset allocation - conservative all the way out to asset allocation - aggressive. Allocations remain static. Investors may shift from one to another as their life situation evolves. Big problem with Oppenheimer’s is that they charge an “allocation fee” on top of the fees incurred from the underlying funds. However, I’m sure you could find something similar from T. Rowe and others without the added fee.
Yes, very good article. I never really thought of balanced funds as "target risk" funds, but it's true. For over thirty years we maintained a substantial investment in American Century's "Strategic Allocation (Moderate)", a "balanced" fund. There were three types offered: "Conservative", "Moderate", and "Aggressive".
When I now look at the American Century site, this family of funds is no longer called "Balanced"- now they are called "Target Risk", and the spectrum has been expanded to five allocation models, from "Very Conservative" to "Very Aggressive".
I would venture that their "Target Date" offerings are more than likely very similar (if not identical) in makeup to the "Target Risk" funds, but simply moving your position down the spectrum from Aggressive to Conservative as time elapses and the target date becomes near.
I haven't looked at details with respect to any possible "allocation fees" for this product at American Century, but there were no such fees with respect to the old "balanced fund" approach.
@Hank, TRP has offered "static" type funds for some time now. For example, they have 2030 (or 20-whatever) target date fund and 2030 retirement fund. Target date will change portfolio balance as it nears your retirement year. 'Retirement fund' never changes portfolio balance. 'Target risk' is a much better, clearer name than 'retirement fund' for the static portfolio though.
Thanks for explaining that @MikeM. Too many different funds from TRP nowadays if you ask me, but I guess they need that to remain competitive. Have to wonder if they couldn’t rename that static fund category. It need not be solely for retirement. May be good reasons someone wants a particular risk exposure regardless of years to retirement.
20-25 years ago I could name most of TP’s funds and explain what they were all about. Today it’s hopeless.
Another thought. That “allocation fee” Oppenheimer slaps on their allocation funds - might make sense if the underlying funds they hold are some type of institutional class or otherwise paying a lower ER. I doubt that’s the case, but might be worth someone’s time to check on it.
Both series of T. Rowe Price funds, "Target Date" and "Retirement", have glide paths. If you want static allocation ("target risk") funds, those would be Price's "Personal Strategy" funds.
Here are the glide paths for the Target Date funds and the Retirement funds. The former are more conservative.
This series is not to be confused with older allocation funds like TRP Balanced (RPBAX), with its somewhat more mundane allocation of 65% stock, 35% bond.
Comments
Essentially the article gives a detailed description and history of TD funds, and relates how some investors evidently thought that such funds somehow provided a good degree of safety from capital loss, especially as the funds neared maturity.
The report also gives a typically balanced set of opinions pro and con on whether or not these funds are suitable for everyone (of course not), and discusses some of the available options and alternatives.
I realize that this is a pretty poor overview of the article, but sometimes an accurate short summary of a long report isn't really feasible. ( Just ask Attorney General William P. Barr about that.)
OJ
Derf
Well, we seem to have hashed and rehashed target date funds over the past couple years. No two are the same - nor do they claim to be. What’s in a name? Very little. Best to read and understand the prospectus, look at how the fund is currently allocated and than do your own analysis of how you’d expect it to perform. Very few here appear to use them.
Admittedly, many are sold to investors with limited financial knowledge or experience. But given regular contributions and enough years left untouched, virtually all these funds should profit the individual better than had he / she stashed the money under the mattress or in a low yielding savings account. Since many are bought within a workplace plan, let us hope the employer has done his homework and acted in good faith on the part of the employees. It’s important to use funds with lower fees.
http://fiduciarynews.com/2015/05/the-big-401k-fiduciary-question-target-date-or-target-risk/
Derf
I hadn’t heard the trim “target risk fund” before this. But they make good sense. With target date funds you’re making a lot of assumptions about the future. What will your situation be 20 years down the road? What will your home and other acquired assets be worth than? Your health and family situation? Will you still feel like working than?
Target risk funds attempt to maintain a static level of risk suitable for current situation. I’m reminded of a series of funds Oppenheimer offers. They have a series of four or five ranging from asset allocation - conservative all the way out to asset allocation - aggressive. Allocations remain static. Investors may shift from one to another as their life situation evolves. Big problem with Oppenheimer’s is that they charge an “allocation fee” on top of the fees incurred from the underlying funds. However, I’m sure you could find something similar from T. Rowe and others without the added fee.
When I now look at the American Century site, this family of funds is no longer called "Balanced"- now they are called "Target Risk", and the spectrum has been expanded to five allocation models, from "Very Conservative" to "Very Aggressive".
I would venture that their "Target Date" offerings are more than likely very similar (if not identical) in makeup to the "Target Risk" funds, but simply moving your position down the spectrum from Aggressive to Conservative as time elapses and the target date becomes near.
I haven't looked at details with respect to any possible "allocation fees" for this product at American Century, but there were no such fees with respect to the old "balanced fund" approach.
20-25 years ago I could name most of TP’s funds and explain what they were all about. Today it’s hopeless.
Another thought. That “allocation fee” Oppenheimer slaps on their allocation funds - might make sense if the underlying funds they hold are some type of institutional class or otherwise paying a lower ER. I doubt that’s the case, but might be worth someone’s time to check on it.
Here are the glide paths for the Target Date funds and the Retirement funds. The former are more conservative.
Target Date glide path:
Retirement glide path:
The Personal Strategy funds are:
Income (PRSIX) - 40% equity (55% bond/cash, 5% alternative)
Balanced (TRPBX) - 60% equity (35% bond/cash, 5% alternative)
Growth (TRSGX) - 80% equity (16% bond/cash, 4% alternative)
This series is not to be confused with older allocation funds like TRP Balanced (RPBAX), with its somewhat more mundane allocation of 65% stock, 35% bond.