For the first time since 2008, Target Date Funds (TDFs) posted an annual loss. According to the Callan Target Date Index, the median TDF dropped .86% though gains of 3.01% in the 4th quarter mitigated those losses. Longer term TDFs suffered greater loses than shorter term funds because of their increased equity exposure.
TDFs have reached nearly $800 billion in assets gaining $70 billion in 2015 capturing an estimated 70-80% of new contributions in DC plans like 401(k)s and 403(b)s. A big reason for their popularity is their use as default options known as QDIAs (qualified default investment alternatives) promulgated by the 2006 Pension Protection Act. But just as DC plans started using TDFs as their QDIA with more plans using auto-enrollment, the market collapsed with the average TDF losing 26.41% in 2008. Some funds lost as much as 40%, even those for people close to retirement, exposing the fact that some funds have greater risk and others expected investors to keep the assets in the fund (known as “through” funds) rather than cashing out (known as “to” funds).
The median cost of a TDF according to Callan which tracks 44 fund series was .60% with a high of .82% and a low of .16% as some funds use indexed rather than actively managed investments.
Though TDFs are widely used, there is also wide misperception. Some investors believe that returns are guaranteed and many other misuse them by not putting all assets in the fund either using multiple TDFs or supplementing their portfolio with other investments. Though some experts advise investors to put all their money into a TDF, some more sophisticated investors close to retirement age, for example, but either still working or with significant outside assets may wish to be more aggressive and younger investors with less tolerance for risk may want to be more conservative. TDFs assume that all investors born within five years have the same risk tolerance which is obviously not true but perhaps better than most investors creating their own portfolios.
