Controversial TDFs
In our August 2009 issue, Securities and Exchange Chairman Mary
Schapiro told the Journal of Financial Planning the SEC
planned to shine its regulatory spotlight on target-date funds
(TDFs).
"Funds with the same target date have produced some widely varying
returns, leading to questions about their glide paths and whether
it's potentially misleading to use a date in a fund's name,"
Schapiro said.
Author and professor Zvi Bodie, interviewed for our February 2010
issue, questioned the wisdom of including these popular funds as a
default investment option for defined contribution plans under
Department of Labor rules for qualified plans.
"I took a look at how target-date funds performed recently and
those with a target date of 2010 lost more than 30 percent of their
value, on average," Bodie said. "Is that appropriate for people
close to retirement?"
In this issue, Bodie and coauthors Richard K. Fullmer and Jonathan
Treussard further probe this topic in what is likely to be a
controversial paper: "Unsafe at Any Speed? The Designed-In Risks of
Target-Date Glide Paths." The authors call for new standards for
the safety and labeling of qualified default investment
alternatives such as target-date funds, comparing the need for such
standards to the need for food and automobile safety. Your level of
concern will probably depend on your own experiences with
TDFs.
Another trio of authors weighs in on the TDF controversy in "Asset
Allocation for Retirement: Simple Heuristics and Target-Date
Funds." Steven D. Dolvin, William K. Templeton, and William J.
Rieber examine common asset allocation strategies for retirement
investing, including those of leading target-date funds.
Dolvin, Templeton, and Rieber note that most TDFs seem to employ a
strategy similar to the 120 minus age formula for determining the
allocation to equity. Historically, strategies based on that
formula have performed comparably to other strategies. The authors
believe TDFs may have a place, especially among less sophisticated
investors who do not use professional planners and are otherwise
prone to bad habits such as chasing returns.
Chances are neither of these articles will prove to be the final,
definitive article on TDFs, especially with regulatory review
pending. And even experts who respect each other's methodology and
research do not necessarily agree. That's why we continue to
provide a forum for diverse, sometimes controversial
articles.
At the very least, these two articles expand the body of literature
on target-date funds specifically and retirement investing in
general. They underscore the need to clearly and carefully discuss
with, and disclose to, your clients how the objectives and methods
of measuring risk differ for target-date funds compared to other
investment vehicles.
The TDF issue is debated daily in the financial community. If the
Journal failed to provide a forum for important, well-thought-out
viewpoints on such subjects, we would be doing a grave disservice
to our readers. It is our hope that these articles will generate
equally thoughtful consideration by readers and potential
researchers. After all, the last chapter has not been written on
this issue.
Lance Ritchlin
Editor
