Against Target Date Funds (Part 2)
Posted by Mark on September 29, 2016 at 07:33 | Last modified: August 9, 2016 11:56I previously discussed two articles in the June 2016 AAII Journal arguing against target date funds (TDFs). Charles Rotblut, CFA, (AAII vice president and editor) wrote a third article in the same issue that takes aim at TDFs.
In the article, Rotblut samples six different TDFs. He discusses the importance of speed to final allocation:
> The Vanguard fund will reach its final allocation
> by 2027, versus 2030 to 2039 for the Fidelity
> fund. A shorter glide path and a larger
> allocation to bonds… may be a plus for
> someone with a shorter expected life span and/or
> greater cash needs in retirement… The ideal
> strategy provides a person the right amount of
> money to fully fund retirement and no more
> beyond what is desired to be bequeathed.
Rotblut says target date depends on expectations for other retirement income that may ease the burden on your nest egg:
> For example, say you plan to retire in 2020… if
> you do not expect to be reliant on your portfolio
> for retirement income—thanks to a pension or
> other sources of income—you could choose to go
> with a 2025 or later-dated fund instead. A
> later-dated fund will give you a greater
> allocation to stocks at retirement and thereby
> more long-term growth. On the flipside, if you
> don’t think you will be able to withstand a bear
> market near your retirement date, you should
> consider a shorter-dated fund.
Rotblut concludes by suggesting creation and management of one’s own portfolios:
> Setting aside questions about whether TDFs use
> the most optimal allocation strategies… the
> biggest downside to them is the lack of
> customization. Shareholders in these funds
> are locked into specific fund families. They
> are also locked into allocation ranges based
> on planned retirement ages.
I think his most damning critique of TDFs comes near the beginning of the article where Rotblut shows a lack of clear consensus on capital allocation. Six funds with a target date of 2020 have a current allocation of stocks and bonds ranging from 38-65% and 30-59%, respectively. Final fund allocations for stock and bonds range from 20-30% and 46-80%, respectively.
How much of a leap is it to suggest I might as well put on a blindfold and take aim at a dartboard?
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