It's not news to say there's a problem with target date funds (see "Are Target Date Funds a Ticking Time Bomb?" FiduciaryNews.com, Feb. 10, 2015). What might be more interesting to discuss, though, is just what will eventually replace these Rube Goldberg investments.
Sooner or later, the market will experience one of its customary dramatic pullbacks. When that happens, target date funds will come tumbling down like so many Jills after Jack. Retirement saver will cry, consumer advocates will cry "foul," and regulator will simply foul things up per usual.
Smart advisers, though, will already have the replacement for these popular default options. The replacements will no longer feature funds of funds as the primary vehicle, opting instead for traditional stock and bond holdings. This will eliminate those layers of unnecessary fees, a benefit that will immediately accrue to the retirement saver. Furthermore, the replacements will remove the ambiguity of the meaning of "date."
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This may be the most significant development of all. Imagine all the time that would be saved if advisers didn't have to explain that whole "to" or "through" glidepath thing and how it relates to the date.
And what "date" does the date refer to anyway? Retirement savers could then stop worrying about "dating" and begin to focus on things that matter: like achieving a comfortable retirement. The world would then become ideal.
What kind of weird science fiction must we invent to create such a perfect product? Can this reality ever be attained, or is it destined to remain forever locked in an unapproachable alternative universe? Worse, will we have to suffer through several years of live "beta" testing before we know if it even works?
Would you believe me if I told you we already have such a product, it's being used today, and, in fact, it's been around longer than target date funds?
It's all true. As many of you have already guessed, I'm referring to "target risk" or "lifestyle" funds.
These are those much-beloved balanced funds with asset allocation tailored toward conservative, moderate and aggressive investors. They're not perfect (yet), but part of that is due to the lack of what we might call "retirement planning process infrastructure."
Part of that infrastructure exists today. Many retirement advisers are already using some form of Goal-Oriented Targeting.
Again, those astute readers know where I'm going with this. We call these lifestyle funds "target risk" funds because "conservative," "moderate," and "aggressive" all denote "risk."
Unfortunately, like the word "date" in target date funds, these terms tend to wallow in ambiguity.
Does "moderate" mean the same thing to a 30-year-old as it does to an 8-year-old? Would an independently wealthy person define "conservative" the same way a financially desperate person might?
Therein lies the problem with the "target risk" terminology. Let me offer a potential solution. The SEC might not like this, but it does offer practical utility to those employing the Goal-Oriented Targeting methodology.
Let's rename lifestyle funds "target goal" funds. The SEC might not like it because the "goal" – which refers to a target annualized investment return – might imply a promised (rather than a target) return. The SEC assumes all investors are monkeys. OK, let's give them the benefit of the doubt. Let's limit these fund to institutional investors (like retirement plans) who have hired a fiduciary to advise them.
So, consider a change to lifestyle, and stop worrying about those risky dates.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
