More specifically, industry experts debate whether target-date funds’ allocation should be “to” or “through” retirement, with the former having less equity at the anticipated retirement date and the latter keeping a sizeable portion. However, despite the variety of asset allocations across fund families, many of the funds have the same target date in their name (see “IMHO: When You Assume…”). The problem, especially during the last year, was that many advisers didn’t adequately understand the differences among target-date funds—and therefore couldn’t explain the differences to their clients, said David Krasnow, president of Pension Advisors, speaking on a panel at the PLANADVISER National Conference.
In order to educate participants about the differences, advisers must first “understand the methodology of what we’re promoting,” Krasnow said. Some argue that the differences are clearly written into the prospectus, however, Krasnow contended that telling people to read the prospectus is like telling an 11-year-old to read the dictionary. “The burden comes back to all of us,” he told advisers in the audience.
Steven Geisert, vice president at Godman Sachs said the biggest decision a plan sponsor will have to make is what the target date is (whether the plan sponsor wants a “to” or “through” retirement fund). Advisers can help by explaining how to arrive at the date and the asset allocation behind it. “And honestly, call us, the money manager, and make us come in and explain it,” he said.
Regardless of which type of target-date fund is in the plan—whether the fund is meant to be for life or just go to retirement—“I think it’s our job as an adviser to work with the vendor to make sure participants understand,” Krasnow said.
Better communication won’t solve the target-date dilemma; it must also come with a redesign of the funds, noted Joe Simonian, head of DC analytics at PIMCO. From a behavioral finance perspective, even if participants had understood the high allocation to equities in their portfolios, they might have still “run for the hills” by selling out at a loss when the markets imploded last year, Simonian said. He asserted that one doesn’t have to be anti-equity to recognize that there was just too much equity in target-date funds at retirement; at some point there is a need to preserve capital.
Simonian said the majority of target-date providers failed miserably, blaming it on the “arms race” to create target-date funds. “We have to be cognizant of the fact that we can ruin people’s lives,” he commented.
Could we be entering phase II of target-date funds? Al Schwartz, director of institutional Portfolio Management at M&I Investment Management Corp., mentioned that the markets will weed out the target-date funds that failed. However, he also noted that he hopes not all plan sponsors will now go too conservative in their selection of a fund suite. Advisers need to help sponsors determine the right fund by looking at the metrics of the plan, he said.
As the next generation of target-date funds comes forth, maybe we will see more variety and less proprietary investments. Schwartz noted the value of having open-architecture funds and the ability to mix passive and active funds. “There’s a use for both [passive and active funds], and I think professional managers can really take advantage of that.”