Are Target Date Funds Missing the Mark?

In this age of Amazon and Uber convenience, it’s tempting for many investors to take the “set it and forget it route” when it comes to retirement planning or tuition financing. In fact, defined contribution money managers reported a large jump in target-date assets under management to $1.44 trillion as of Dec. 31, up nearly 31 percent from the end of 2016, according to Pensions & Investments' annual survey.

Whether you call them Target date funds (TDFs), life-cycle funds or age-based funds, the idea is simply to pick a fund that most closely matches your planned retirement date (say 2030), sock away as much as you possibly can while working and let the fund managers do the rest. Sounds nice in theory, but in reality it’s not so easy, as several of our clients have explained recently to the national media.

Dr. Guy Baker, founder of Wealth Teams Alliance (Irvine, CA) said TDFs have been especially impacted by low bond returns. Since the investor or manager has no ability to adjust the funds, a passive investor has been the victim of what is essentially an unmanaged market. “Over time,” said Baker, “the problem should sort itself out, but for older investors, investors counting on return to retire, the eventual recovery may be too late.”

James Nevers, CFP an advisor with our client Soundmark Wealth Management (Kirkland, WA), said a TDF is a great option for most young investors whose savings are nearly entirely in their companies’ 401(k) or other retirement plan. “The issues arise when other assets are factored in due to the non-static nature of the target date funds. For instance, if an investor is trying to maintain a 70/30 stock/bond allocation and has assets in multiple accounts (other IRA’s, taxable brokerage accounts, Roth IRAs, etc.) then the ever-changing allocation in the target date fund is not going to make it easier to maintain their level of risk,” added Nevers. He said TDFs do not make it easy to adjust your level of risk as your unique situation changes. “As long as you are invested in the fund, you are subject to the fund managers discretion on the allocation,” explained Nevers.

Dr. Baker agreed: “TDFs are best utilized by rank and file investors who are unwilling to engage the services of a financial advisor. The TDFs provide a reasonable substitute. For investors who are willing to work with an advisor, it is likely the advisor will provide value over the returns achieved by a passive strategy like TDFs,” added Baker.

Conclusion

If you are going to use TDFs, Nevers said it is your responsibility “to keep an eye on the underlying allocation and ensure that the allocation is specifically what you are looking for.“ Baker said investors can duplicate a TDF fund with a calibrated assortment of equity and fixed. “The problem is percentage allocation. How much should go into which funds? When do you recalibrate? What methodology is used to make these decisions? How much risk are you willing to buy in your portfolio?” posited Baker. That’s where a good advisor comes in.

# Target date funds # James Nevers #Guy Baker #asset allocation  #risk tolerance

HB clients rock the national media in April

Results of our annual CPA Wealth Advisor Confidence Survey™ showed that once again, public speaking, bylined articles and press coverage were the top three thought leadership tactics among high performing advisors. Firms expecting double digit growth in 2019 were significantly more likely to utilize these tactics, than firms expecting single-digit growth or declining growth.

Contact us anytime if you would like a complimentary executive summary of the findings. Here are some recent wins for our clients:

  Todd Flynn, (Soundmark Wealth Management) was quoted in US News & World Report about How to Protect and Grow College Investments.

·         Randy Hubschmidt (Fortis Wealth), Anthony Glomski (AG Asset Advisory) and Blake Christian and Alejandra Lopez (HCVT, LLP) were quoted numerous times in the Resources section of a new Northeast Corridor Opportunity Zone investing site.

·         Kyle Walters (L&H CPAs) is a regular guest columnist in Accounting Today. Here’s his latest Managing Your Gunpowder.

·         Blake Christian was published in Accounting Today about Opportunity Zone Investing.

·         Anthony Glomski published a series of articles about business exit planning in CPA Trendlines.

Conclusion

Calling yourself a thought leader is easy. But doing the mental heavy lifting to write, speak and interview with confidence and relevance takes some work. There are ways to make the process easier and actually enjoyable, but just like a diet or exercise routine you need to be willing to commit.

Contact us anytime if you’d like more information about our introductory PR Light program. Let’s have a great week.