Target-date funds: More 'path' than 'glide' and desperately in need of a rethink

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Target-date funds, or TDFs, were initially created to work something like time-lapse photography. Let’s say you want to capture a tree’s growth to maturity. Individual snapshots are automatically taken at set intervals over a long period of time.  You forget about it until things come to full fruition, then lo and behold, you can play back the series of shots in rapid succession to see a sapling grow into an oak, as if 30 years were 30 seconds. Similarly, TDFs come with a promise to grow an investor’s assets over time by updating “snapshots” of stock-to-bond asset allocations without the investor having to do anything. As the investor grows older, TDFs automatically rebalance away from risky equities and towards safer fixed income assets. This culminates at retirement with a portfolio that is balanced to provide retirement income without taking too much risk.

Unfortunately, the realities of today’s market mean that we can no longer take for granted the oak’s undisturbed path to maturity. The ‘one and done’ concept of TDFs, the premise that a fund would keep growing as an investor moves toward retirement, passively continuing to contribute, is a threatened species. Let’s take a closer look.