NY Times article about Target-Date Funds

You’re on Autopilot, but Check the Speedometer


By MARY WILLIAMS WALSH
Published: July 13, 2008

TARGET-DATE funds have been sold as a kind of autopilot for 401(k) plans, freeing workers from ever having to look at their retirement accounts. But the funds may need a second look themselves.

A new study has found a striking lack of consensus about how the funds should operate, leaving employees and retirees exposed to widely varying levels of risk. The fees that the funds charge vary widely, too.

http://www.nytimes.com/2008/07/13/bu...ml?ref=mutfund

[cute fuzzy bunny]

My favorite still is vanguard changing the contents and acceleration of their funds after people had already invested in them.

Gee...thanks.

[thaidyed]

I was really wondering about these. Seems to be putting a lot of trust in the hands of the company without easy access to the kind of information you need to assess your situation, risk , etc.
But the simplicity is so attractive. Rats! Again, no free lunch...

[bssc]

Our target fund is a fund of funds of funds with total fees of about 2.5%. I avoid it but most people don't.

[CitricAcid]

I have never read one of the prospectuses of any of these target funds, but it should be made very explicit what the "changing portfolio" means. I have a feeling that many people who are planning for retirement a while from now are actually not as risk tolerant as the Later (2025,2030) retirement dates would assume, while others are. In other words-and I don't know as I haven't read the prospectuses- it should be generally outlines how the AA changes over time and how risk-averse the fund actually is.

[FinanceDude]

I'm not a big fan. I understand the concept, but most folks will find themselves heavy in bonds right at the time they retire, leaving inflation to erode their purchasing power to oblivion.

Folks on here will be proactive and perhaps "ladder" these funds or do rebalancing, I don't think "average investor" Joe is going to do that. I can't say they are a gimmick, but why did it take 80 years plus to come up with them? I think you could do the same thing more simply in a good old balanced fund........

[ziggy29]

Quote:

Originally Posted by FinanceDude I'm not a big fan. I understand the concept, but most folks will find themselves heavy in bonds right at the time they retire, leaving inflation to erode their purchasing power to oblivion. Folks on here will be proactive and perhaps "ladder" these funds or do rebalancing, I don't think "average investor" Joe is going to do that. I can't say they are a gimmick, but why did it take 80 years plus to come up with them? I think you could do the same thing more simply in a good old balanced fund........

Good point. I think the typical "target fund" is at least 10 years too conservative, but the type of "set it and forget it" investor that target funds appeal to may not be savvy enough about investing and asset allocation to figure that out. After all, if they were that savvy, they'd be more likely to "roll their own" AA...

[Marquette]

I rolled $30k into the Vanguard 2050 fund. I'm "retiring" in 2023 at 45. Will let you know in a few years if it worked out like I wanted.

[Lusitan]

I hold a Target Retirement fund as the core of my portfolio right now, with some tweaks to get the asset allocation more to my liking.

One of the biggest benefits in my case is that it lets me leave my retirement savings on true "autopilot" when it comes to rebalancing. Especially in times like these, when the stock market is falling 20% in a matter of months, I'm not sure I have the fortitude or, frankly at this stage of my life, the time to keep my asset allocation in balance by buying more stocks. It really does take a weight off my mind when it comes to rebalancing.

As my FIRE stash grows, I'll probably look to break out of the Target Retirement fund the capitalize on the discounted Admiral Shares, and as I get closer to FIRE (and in FIRE) I'll no doubt manage my own asset allocation. But during this accumulation phase, I appreciate the Target Retirement options.

[Goonie]

I have two T. Ron Popeil Rowe-Price "Set it & Forget it" Target funds...one for a Roth IRA, and the other for my Roll-over IRA. The Roth is their 2020, and the Roll-over is their 2030......and I ER'ed April 2007 at 50. Since my money is in them for the long haul (probably 15-20 more years), I have a higher risk tolerance than if I'd be needing my money in the near future. And like Lusitan stated "I'm not sure I have the fortitude ....to keep my asset allocation in balance by buying more stocks".....I might have.....but I might not too.

I'll let TRP do their thing with that stash of my money, and I'll gamble invest all the rest of it as best as I see fit. My hope is that TRP and myself will both be highly successful in our efforts & endeavors to make wise decisions with our my investments.

BTW, I did (do) read their prospectuses (sp?), and knew (or know.....though don't remember it all) how they 'shift' as the years go on. And, if years down the road those funds aren't what floats my boat.....I'll move that stash to something different. But for now, 'auto-pilot' is fine by me.

[al_bundy]

the reason i will stay away from these is because by the time the markets go into another bull cycle and as it progresses, the fund will be shifting out of stocks while that asset class will be the strongest

[GatorBuzz]

Quote:

Originally Posted by al_bundy the reason i will stay away from these is because by the time the markets go into another bull cycle and as it progresses, the fund will be shifting out of stocks while that asset class will be the strongest

Wouldn't that depend on how far out your target date is, though?

[FinanceDude]

Quote:

Originally Posted by GatorBuzz Wouldn't that depend on how far out your target date is, though?

True, but they ALL are a sequential march AWAY from equities and into fixed income..........

[GatorBuzz]

Yeah, but that march could start years down the road. There really isn't much difference between Vanguard 2050 and 2055 for the next several years, for example. Maybe.

[al_bundy]

Quote:

Originally Posted by GatorBuzz Wouldn't that depend on how far out your target date is, though?

i'm in the mid 30's so a Target 2030 or 2040 fund would be for me

historically a secular bear market lasts 15 to 20 years. if you take 2000 as a starting point then 2015 or 2020 would be the start of a new bull market. most of the gains in a bull market come in the last years of it's life as people jump on the stock bandwagon. Reason is simple, in the early years people still remember the bear and take risk very seriously. in the later years people think a market index doubling in a year is normal

Say a new bull will start in 2015 and will last an average of 20 years. That's a target of 2035 for it to end. A 2030 fund will be rotating out of stocks just as the best part of a bull will start. a 2040 fund will also be heavily rotating out of stocks in the last legs of a bull as it's best gains are being made.

[GatorBuzz]

Thanks. That makes sense to me. But wouldn't most investors who control their AA also be getting more and more conservative? Sorry for the hijack...

[Lusitan]

Quote:

Originally Posted by al_bundy the reason i will stay away from these is because by the time the markets go into another bull cycle and as it progresses, the fund will be shifting out of stocks while that asset class will be the strongest

I don't think so. The asset allocation changes very slowly over time, with almost zero change in a five year window, and only minimal change over a 10 year window. For example:

TR2040
equities = 89.56%
bonds = 9.99%
(balance in short term reserves)

TR2035
equities = 89.83%
bonds = 10.03%
(balance in short term reserves)

TR2030
equities = 85.63%
bonds = 14.16%
(balance in short term reserves)

TR2025
equities = 78.23%
bonds = 21.69%
(balance in short term reserves)

[Lusitan]

Quote:

Originally Posted by GatorBuzz Thanks. That makes sense to me. But wouldn't most investors who control their AA also be getting more and more conservative? Sorry for the hijack...

Exactly - anyone who rebalances their portfolio will be selling off some of their recent winners (stocks) and buying some of their recent losers (bonds) in that scenario.

Unless you're just going to set your asset allocation now, and then let it ride and not rebalance, I don't see how you avoid shifting money out of equities in a bull market.

Sure, there's the underlying fact that, as you approach retirement, your asset allocation itself becomes more conservative, so you naturally shift money away from stocks. But that's the whole underlying principle of the TR funds; if you don't buy into the idea of making your asset allocation more conservative as you approach retirement, then clearly the TR funds aren't for you.

In any event, I'm in the same age range as you, and I hold TR2040 as the core of my portfolio right now. And at times like these, when stocks are tanking, I'm glad that a good portion of my retirement savings are automatically rebalancing and picking up stocks on the cheap, while I try to ignore what's going on with the market ...

[al_bundy]

Quote:

Originally Posted by GatorBuzz Thanks. That makes sense to me. But wouldn't most investors who control their AA also be getting more and more conservative? Sorry for the hijack...

i don't believe the go into bonds because you are old thing. i've been reading about these cycles for the last year or two and it's amazing that every 20 years or so stocks stage a spectacular crash and stay down for another 20 years. Reasons change, but it always happens. don't see why it will change in the future

[al_bundy]

Quote:

Originally Posted by Lusitan I don't think so. The asset allocation changes very slowly over time, with almost zero change in a five year window, and only minimal change over a 10 year window. For example: TR2040 equities = 89.56% bonds = 9.99% (balance in short term reserves) TR2035 equities = 89.83% bonds = 10.03% (balance in short term reserves) TR2030 equities = 85.63% bonds = 14.16% (balance in short term reserves) TR2025 equities = 78.23% bonds = 21.69% (balance in short term reserves)

how are they going to allocate it say 2-3 years before the Target year? my whole point is that for 2030 and 2040 the funds will be selling stocks just as a historical move up will probably start, if you believe that history will repeat itself.

i went back and checked. SP500 went from 100 to 1500 in the last bull market. It went from 100 to 300 in the first 10 years and to 1500 in the latter part. And the whole time the stock portion of the Target funds will be going down and will probably pick up a the end. and since most of the dollars in investing are made in the last years as you go into bonds the money you built up in the accumulation phase will return very little compared to the historical stock returns of past bull markets