Time to send target date funds to the showers?

Both Consumer Reports and The Wall Street Journal have recently reported target-date funds (TDFs) continued to underperform in 2011. Moreover, when parsing the data from 2011, it looks like TDF portfolio managers ignored the lessons of 2008. Once again, TDFs with near-term or expired targets (i.e., 2010) lost money when the markets tanked in the third quarter. Although many advisers, as cited in “401k Plan Sponsor Concern: Target Date Funds Still Broke,” (FiduciaryNews, January 10, 2012), question when TDFs will finally get their act together, they’re not ready to throw in the towel on them yet.

Let’s take a look at the success and failure of TDFs. When the DOL included them on the list of default funds in 2006, not many people had heard of TDFs. They knew of Lifestyle Funds and Balanced Funds (also placed on the list), but TDFs were relatively new creatures. Not much was known about them, and that included their underlying fees, their underlying investments as well as not even a whiff of a track record. Still, the industry saw a way to increase margins and investors bought the “set-it-and-forget-it” sales pitch of TDFs with a vengeance.