Target-date funds have been a boon to the investment industry, helping to get people to save for retirement, but some big changes could be coming soon aimed at making sure nest eggs are better protected.
Introduced in the early 1990s, the majority of defined contribution plans now default into a target-date or other professionally managed account. The asset allocation in such funds becomes more conservative as the target date (usually retirement) approaches.
In April, the SEC’s Investor Advisory Committee agreed that most individual investors are ill-equipped to identify the risk disparities among similar-seeming funds. It also found that many professional pension fund consultants underestimate the degree of risk in many target-date funds.
To underscore the disparity point, a recent Morningstar study of 36 funds with a target date of 2020 found that their equity weightings ranged from 35 to 80 percent.
Unless plan sponsors know their employees plan to keep their money in the employer-sponsored plan until they die, they should “assume they are not going to do that,” Kasten said.
That means companies should manage their plans to a more conservative landing point because it is very unusual for people to stay in a job for 25 years and keep their money in the company-sponsored plan when they retire, he said. Most people roll their accounts over to an IRA when they leave a job because they want greater control over their money.