As Target Date Funds Lose Their Allure, What Should Fiduciaries Do?
Confusion over the objectives of target date funds has taken a toll. Worse, many fiduciaries are not vetting these funds, choosing to entrust the assets to their bundled service providers.
Target date funds can provide great value to investors, and as a fiduciary you can use them effectively if you clarify objectives and manage the risks involved.
The objectives should be clear: First, avoid losses. Second, maximize performance without violating the first goal. Then use a simple risk management process in conjunction with these two goals.
You can deliver growth without jeopardizing the preservation objective if allocations are moved to safety at the appropriate time. The shift from growth to safety over the employee’s working life is the purpose of target date funds.
Timing and tactics are critical. The key is determining when to apply the brakes and how forcefully.
Research demonstrates that a broadly diversified growth portfolio is highly unlikely to lose money over a holding period of 15 years or longer, which inspires applying the brakes gently starting at 15 years to target date. In time, the mathematics of liability-driven investing triggers a more-forceful application of safety and emphasizes a curvilinear glide path that reduces equity exposure to zero by the target date.
The glide path should strive to balance the accumulation of growth, using the world market portfolio strategy, with the mandate to defend. This simplified approach eliminates the need for the complexities and confusion that otherwise bedevil target date funds.
To learn more about the proper objectives and risk management strategy for target date funds, tune in to my free webinar at 4 p.m. Sept. 15 at Advisors4Advisors.com.
In the meantime, have a little fun with this video presentation, “The Sad Comedy of Target Date Funds.”
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