Schwab TDFs earn negative rating

A surpising "negative" rating for a family of Charles Schwab target date funds is bringing some new focus to the challenges of managing those products.

Morningstar issued the rating last week, citing consistent overturn in the management of Schwab's TDFs and a lack of experience among those in charge of the products.

According to a report by Morningstar analyst David Falkof, that frequently changing list of manager has included Daniel Kern, who oversaw the products from Oct. 2008 until last year, followed by Mike Gilliam, a Schwab veteran who handled the TDF holdings for just seven months.

Gilliam's replacement since February is Zifan Tang, a Barclays veteran who is new to portfolio management, Falkof noted, with "no previous public track record managing money ... the ultimate portfolio decisions are now in the hands of a novice manager."

Schwab insists the funds are still under trained and professional management, with a larger family of experts overseeing the decisions made: Falkof counters that two thirds of the Schwab TDF investments are in total market and short-term market index funds, both of which have seriously underperformed.

TDFs - and their appropriateness as an investment tool - have been criticized by organizations such as the Investement Fiduciary Leadership Council, which questioned the merits and the prudency of TDFs in retirement plans.

"Not every employee has the same risk tolerance or financial goals as their colleagues," wrote the organization in a prepared viewpoint. "The importance of establishing risk tolerance is, by itself, enough to make everyone think twice about using target date funds as a form of retirement investing."



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