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Investment Managers Should Not Design Target Date Funds

Jun. 04, 2020 3:44 PM ET8 Comments
Ronald Surz profile picture
Ronald Surz


  • Target date funds should be designed by financial engineers for the benefit of beneficiaries.
  • Target date funds are mostly designed by investment firms for profit.
  • Although risk has been highly rewarded in recent times, dangers lie ahead, even beyond Covid-19.

Certain professions should not attempt to invade the provinces of other professions. For example, butchers should not design furniture and geologists should not design toilet seats.

Such is the case with target date funds (TDFs). TDFs should be designed by financial engineers, following the specifications of experts in retirement savings and investments. In this article we discuss the differences between TDFs designed by investment firms and those designed by financial engineers.

When TDFs are designed by investment management firms

Investment management firms are in the business of investing other people’s money for profit, the more profit the better. Accordingly, their design of a TDF maximizes profits within the rules of TDFs. The only such rule is that the glide path should reduce risk through time, but the amount of reduction is unspecified. On the profit side, the greatest profit is made at the target date because that’s when account balances are their highest. Combining the rules with the profit motive leads to a design with the highest equity allocation allowed at the target date. That highest acceptable allocation is about 60% based on the actual TDFs designed by investment management companies.

The other consideration is how the remainder is invested, basically the amounts in long-term bonds and safe assets like stable value. Since fees on long-term bonds are higher than those on safe assets, the majority of the balance is in long-term bonds.

TDFs designed by investment management companies start out invested mostly in equities for young beneficiaries. This is particularly good for fund companies except there is not much money in these long-dated funds. The real money is in funds near the target date. These near-dated funds are relatively less risky than long-dated, with 55% in equity, but still quite risky.

Near-dated funds are high risk because most of

This article was written by

Ronald Surz profile picture
I'm president of  Target Date Solutions, developer of the patented Safe Landing Glide Path , Soteria personalized target date accounts, and Age Sage do-it-yourself investing. I;m also co-host of the Baby Boomer Investing Show.   My passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book Baby Boomer Investing in the Perilous 2020s and he provides a financial educational curriculum I'm author of 3 books: Baby Boomer investing in the Perilous Decade of the 2020s, & 2 books on target date funds I’m smart with 2 Masters degrees and 55 years in financial consulting. I’m semi-retired, and prefer helping my fellow baby boomers rather than playing golf. I’m worried that our country, & most others, is playing with fire in its money printing. I’m here to help – that’s my legacy space.I help investors deal with life’s investment challenges, with the objective of enjoying a comfortable long retirement. I’m passionate about questioning and improving upon entrenched stale practices like jamming everyone into cookie cutter model portfolios. That's why I produce the Baby Boomer Investing Show live on Youtube and Facebook every other Tuesday at 10:00 PST. Watch live or replay by searching for "Age Sage Robo" on Facebook or Youtube. Please watch and support our Boomer Investing Show on Patreon ( https://www.patreon.com/user?u=35204315&fan_landing=true ) and visit our SA Blog at https://seekingalpha.com/account/authorboard/instablog . As president of Age Sage Robo (please Google), and CEO of GlidePath Wealth Management, I’m responsible for model development using my patented process . I have more than 50 years of financial service experience and hold a U.S. Patent for a time-tested glide path investment process that helps investors navigate the complicated financial decisions they face as they accumulate and preserve assets for their retirement years. Age Sage & GlidePath use this process to build Target Date, Special Purpose, and Life Span Portfolios that are tailored to the specific requirements of clients. My extensive financial career began at A.G. Becker Pension Consultants where I advised on the investment policies of several trillion dollars of retirement plan assets. After Becker I started my own consulting firms that developed innovative services for investors and the financial advisors who serve them. I’ve earned a BS and MS in Applied Mathematics from the University of Illinois and an MBA in Finance from the University of Chicago. I am author of the book "The Remarkable Metamorphosis of Target Date Funds" and co-author of "The Fiduciary Handbook for Understanding and Selecting Target Date Funds"Please visit https://babyboomerinvesting.show

Analyst’s 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.

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Comments (8)

craftbrewinfo profile picture
Problem is that Corporations invest in "dumb funds" for their 401(k) offerings. Such as my company's offering.. I have the Vanguard Target 2035 fund..(companies don't trust educated investors like us so most all corporations don't offer individual stocks). I prefer to buy my own stocks that fit my needs. So when the company stopped the 401(k) match , I diverted that percentage of investment into my IRA, and when I max out my contribution THEN I will reallocate back into the work dumb fund... In a sense playing a shell game with the same money, minus a 3% company match on the 401(k)
ty. I moved to fixed interest and benefited.
Very good points, but why only 10% equities at the 'target date'? If that's retirement, there's still a long time the funds still have to last.
Ronald Surz profile picture
Hi @glinsight
Most folks in TDFs withdraw when they retire, hopefully investing in something good for distribution
@Ronald Surz I don't understand why investors would want to drop to only 10% stocks, and honestly I don't believe it. I've never had a TDF but have dealt with both Fidelity and Vanguard. Their TDFs are designed to carry over into retirement. Vanguard merges their TDF into an 'income' fund 7 years after the target date. As I recall, Fidelity does something similar. Both of their 2015 funds are 20% - 25% stocks. Vanguard's 2015 fund has over half the net assets of their 2020 or 2025 funds so it looks to me like folks are not rushing to move the funds to something else.

I'm not praising TDFs here but it seems that someone who put their money into a TDF for their entire career would be unlikely to suddenly change their money management style.
Ronald Surz profile picture
Fidelity & Vanguard's 2020 TDFs are 90% in risky assets: 55% equities plus 35% long-term bonds. If we see anything like 2008, these funds will lose at least 30% in the savings of people who can least afford losses. As I write this, markets are surging forward, so losses seem unlikely, for now. Safety 1st doesn't work, until it does.

Most money in TDFs is from defaulted beneficiaries in 401(k) plans who have no clue that they are taking any risk. No "sudden change." They've never known
ETFguide profile picture
Amen Ron!
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