Conflicting Interests In Target Date Funds

by: Ronald Surz


Target Date Funds (TDFs) have three interest groups: investment managers, fiduciaries, and beneficiaries.

The interests of these three groups are not aligned.

Beneficiaries will be the losers in the next market correction because of these misalignments.

Investment managers create TDFs for profit, which is after all their business. Fiduciaries choose TDFs, presumably for the benefit of participants, but that’s not what is happening. Beneficiaries want to be protected, especially as they enter retirement, but they are actually exposed to substantial risk. In the following we discuss the interests of each of these groups with the intention of moving those interests toward better serving beneficiaries.

Investment Managers

Investment managers have seized upon the TDF opportunity to package product, populating glide paths with proprietary funds. The major misalignment with beneficiary best interests is at the target date, where the typical TDF is 55% in equities, which is riskier than the allocation in 2008 that lost 30%. Risk is born by investors, not fund companies who get paid a premium for higher risk regardless of the outcome. Allocations at the target date are the most important because assets are likely to peak at that date. Management fees for equities are higher than those for bonds.

Investment managers sell the risky allocation as the solution for inadequate savings. Growth trumps safety because participants have not saved enough.


Fiduciaries, namely plan advisors and trustees, want to protect themselves against lawsuits and believe that (1) any Qualified Default Investment Alternative (QDIA) will do, and (2) you can’t go wrong with the Big 3 Oligopoly – Vanguard, Fidelity, and T. Rowe Price -- because everyone else is using them. This is a breach of the Duty of Care that, like our duty to protect our children, holds fiduciaries responsible for harm to our dependents that should have been prevented. Fiduciaries are duty bound to seek the best TDFs for their beneficiaries, but this is not happening. The next market correction could bring lawsuits that remedy this imprudent practice.


Beneficiaries want to be protected as they enter retirement, and may think they are, but they are not. A recent MassMutual Retirement Savings Risk Study examines beneficiary risk preferences in 401(k) plans, summarized as follows:

At 15 years to the target date, the vast majority (75%) want growth over safety, but this preference shifts dramatically so that only 17% prefer growth over safety at retirement. Also shown in the graph, those with another source of income, like a DB plan, opt for somewhat more growth, obviously because their other assets are safe.


Because of disparate interests, there are winners and losers and chumps in TDFs. Investment managers are winning big time since $2 trillion has poured into TDFs in just the past decade. Beneficiaries will be the big losers in the next market correction, but this could be avoided if fiduciaries refuse to be duped by mistaken beliefs of lawsuit protection.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a sub-advisor of the SMART TDF Index and the originator of the 1st and only Robo Analyst that integrates Age with Risk. Please visit my Blog at

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