Target Date Fund Flaws Revealed…Again

Plansponsor Ready Aim Fire Plansponsor recently published a story about a study done by JP Morgan on how participants in 401(k) plans behave at retirement when accessing their savings.  The study found, on average, participants withdraw their entire balance after just three years (just 17% of participants remain in the plan at this point).

Given the trend toward defaulting and encouraging participants to place their money into Target Date funds (funds that essentially manage a participants savings over their lifetime) it seems like a reasonable assumption that todays most popular target date providers would build such an assumption into their glidepath (glidepath describes how a portfolio moves from aggressive to conservative over the participant’s lifetime).  That would be a mistaken assumption.

The majority of Target Date fund assets are with Fidelity, Vanguard and T. Rowe Price and all of them are quite aggressive at the retirement date (somewhere near 60% in stocks) and all of them continue to be aggressive throughout retirement.  But if 83% of people are taking their money out of their retirement plan within three years of retirement, isn’t a portfolio that is 60% in stocks to risky?  Would any prudent planner advise a person who needs their assets within a few years to have such a large allocation to stocks?

There are many things wrong with Target Date funds today, their aggressiveness being just one, they are a timebomb waiting explode and the destruction will be felt most by those who can least afford it – those who are retiring, about to retire or in retirement and have no more years left to work.


Scott Dauenhauer, CFP, MSFP, AIF


7 thoughts on “Target Date Fund Flaws Revealed…Again”

  1. And the people who use TRF don’t want to be bothered by the details. I am still appalled by TR Price rejecting the legitimate conerns of their aggressive allocation in the wake of the 2008 crash. I hope their reputation was tanished by how they responded to people who lost money in their 2010 portfolio which had 63% stocks!

    1. It has not been tarnished, their high allocation to stocks have led their funds to have higher returns than others and thus attract more assets. I think TRP is a great fund company, but their glidepath is not healthy.

  2. We are definitely on the same page Scott. The benefits of TDFs are diversification and risk control, preferably at reasonable cost. The industry is moving at glacial speed toward what it could be. Another 2008 will expedite the movement because there will be lawsuits this time. Pain is a great motivator, & it needs to be felt by fiduciaries rather than beneficiaries.

    1. I agree with your what you are saying and it pains me to be in a situation where so many will be hurt if I am right. Interestingly enough, behavioral economics pretty clearly predicts this exact behavior.

      1. Hi Scott,
        I take it that behavioral economics says that fund companies will offer product based on profit, & fiduciaries will buy it. It’s the fiduciary part that’s sad. You can’t blame a snake for being a snake but you can be perplexed by someone who kisses that snake, especially if it strikes plan participants.

      2. Ron, I was referring to the participants, not the fiduciaries. But common sense would dictate that for-profit companies would sell their products to Fiduciaries and spend a lot of money convincing them they are correct. In addition, decades of having Jeremy Siegel’s Stocks for the Long Run (and a lack of Shiller’s Irrational Exuberance) have convinced Fiduciaries of the supremacy of stocks at all points in time. This is why you have highly educated Fiduciaries kissing snakes!

      3. Got it Scott. Just for clarification, participants typically don’t choose target date funds. Most of the money in TDFs is there by default, on behalf of those who trust their fiduciaries to protect them. Fiduciaries are not vetting their TDF selection. They’re opting for the convenience & familiarity of their bundled service providers. In other words, they’re lazy, albeit highly educated.

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