Target date funds came as a godsend courtesy of the 2006 Pension Protection Act. They have redefined the 401(k) for both the employee and the sponsoring company (see “How QDIOs Have Changed the Fiduciary Role of 401k Plan Sponsors).

At first, they seemed so simple. Then the 2008/2009 market crash occurred. Target date funds tanked with everything else. And people—including Congress—were itching to take names. That's when the bloom came off the rose.

But a funny thing happened. For all the bluster, the angry villagers with their pitchforks and torches never amounted to much. The dollars kept flowing TDFs. Financial professionals dove deep into the underlying assets to parse target date funds. Meanwhile, the dollars kept flowing into TDFs. Worried plan sponsors tried to take actions to reduce the potential fiduciary liability presented by target date funds. Yet, the dollars kept flowing into TDFs.

We all know no two target date funds are the same. Nuances exist, just as nuances exist between the differing investment philosophies of growth and value. And this may prove an instructive analogy.

Stock pickers have generally placed themselves in either the “growth” category or the “value” category. Growth investors focus on earnings and price momentum. The more the stock's price goes up, the more they want to buy that stock. Any little pullback will drive them to the exits, and the stock's prices will plummet.

Value investors, on the other hand, look at those dropping prices as a buying opportunity. They prefer stocks whose prices fall below the accounting valuation as measured by the actual numbers in the balance sheet and income statements. Eventually, the stock prices of value stocks begin to rise, attracting the attention of growth investments.

It's the circle of investing life. Growth investors sell to value investors. Value investors sell to growth investors. In the end, it's a never-ending tug-of-war between the two opposing disciplines. They've fought with each other, each side claiming it held the stronger argument.

For years, investors had to pick one side, and they usually stayed true to their team. As the cycle shifted to growth, growth investors declared victory. When the market winds leaned to favor value, value investors declared victory.

Back-and-forth it went.

Then someone took a look at the actual return numbers. It turns out, ignoring any of the typical snapshot-in-time anomalies, in the long term there wasn't much of a different between the two investment styles. As long as investors did remain true to their school, they'd experience similar returns as their counterparts in the rival school. The only real losers were those who insisted they knew when to switch teams. Market timing hardly ever works as advertised.

To/through… active/passive… it really doesn't matter which type of target date fund the plan sponsor chooses. In fact, from a fiduciary liability standpoint, the only real concern deals with whether the TDFs contain hidden conflict-of-interest fees. They can lead to a real problem. All else, well that's simply six of one and half dozen of another.

Why?

The secret is the word “simply.”

Target date funds do contain aspects that require extensive due diligence on the part of the plan sponsor. Regarding the plan participants, TDFs mean only one thing they only have to know one thing: their birthday.

And if that's all it takes to get them to save more for retirement, then they're on their way to living a comfortable retirement. And isn't that the real objective?

Read more:

Instant Insights /

Warning: Not all TDFs are the same – Carosa

More From HR Executive

Related Stories

Recommended For You