Study hints at the problem with target date funds

Investors are using the funds, which have exploded in popularity, as a side dish instead of an entree. As a result, they are exposed to too much risk, or too little.
MAY 13, 2014
If you're in a retirement plan, chances are good that some of your assets are in a target date fund. Chances are even better that you're hurting your returns. The growth of target date funds has been explosive. Two in every five 401(k) participants held target date funds in 2012, double their share in 2006, according to the latest Investment Company Institute data. More than half of 20-somethings with 401(k)s own them. Retirement plans like target date funds because they offer participants an all-in-one solution. Workers choose the fund that matches their expected retirement year, and the fund re-balances automatically over time, adjusting the risk level. Younger workers get more stocks, which are riskier but tend to offer higher returns, and older workers more bonds. Sounds great. But it won't work unless all of your money in the plan is in the fund. Mix and match with other plan funds and odds are you'll end up with just the wrong amount of risk. And that's exactly what's happening, according to a new study by plan investment adviser Financial Engines and consulting firm Aon Hewitt. Surveying 14 large retirement plans with $55 billion in assets, the study found that just 38 percent of target date fund users rely on such funds for 95 percent or more of their portfolio. The other 62 percent mix them with other funds, allocating about a third to target date funds, on average. That partial exposure hurt investment performance by about 2 percentage points a year. The study found that almost a third of users wound up with too much portfolio risk, and about 30 percent with too little. Target date funds are like a prix fixe menu, offering a well-balanced meal. But workers are treating them like a side order. They're scooping up some target date funds along with servings of bond funds, money market funds and international offerings. Like all bingeing, it's bound to make an investor feel sick. This story first appeared on Bloomberg.com.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.