Target-Date Fund Investors Get More Low-Cost Options, But TDFs Need To Improve In Other Areas Too

Monday, August 20, 2012 15:15
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Target-Date Fund Investors Get More Low-Cost Options, But TDFs Need To Improve In Other Areas Too

Tags: diversification | risk | target date funds

More companies are rolling out target date funds that feature lower expenses for investors, and that’s progress. Unfortunately, lower fees lead to less diversification. In the meantime, TDF companies need to work on risk control.

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More TDFs are lowering investor costs by investing in low-cost index mutual funds, exchange-traded funds or both. A recent article in USA Today points out that index-only TDFs by Vanguard and TIAA-CREF charge an average expense ratio of 18 basis points (bps), while Fidelity’s Freedom Index charges 19 bps and the new BlackRock LifePath Index series charges 28 bps.
 
Those compare with an average 81 bps for TDFs that aren’t exclusively invested in index funds, USA Today reports based on a study by BrightScope and Target Date Analytics.
 
The industry has more work ahead of it to make TDFs truly serve the needs of investors, though. Diversification is inadequate because most TDFs are predominately U.S. stocks and bonds. And low fees equate to low diversification since diversifying assets command a high price, namely commodities, real estate, natural resources, foreign stocks and bonds, etc.
 
Similarly, TDFs are too risky. We learned this lesson in 2008 when the typical 2010 fund lost 25%. Nothing has changed since, so the vulnerable remain exposed to large losses as they near retirement, which is shocking.
 
For more on this topic, please visit Fiduciary Corner (and don’t miss the videos at Bloomberg and Xtranormal).

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