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Missing the Target?
Sunday, July 3, 2011
Bradley R. Newman, CFP®

The volatility of the past three years combined with a healthy sense of uncertainty about meeting retirement goals has left almost everyone feeling a bit anxious about their financial futures.
Unfortunately the target-date funds, which were introduced roughly a decade ago as a mechanism to provide a simple and straight forward approach for retirement plan participants to save adequately for retirement in a fund that was tied to their anticipated retirement date have not provided investors with a sense of calm. As usual the devil is in the details; as these funds gained in popularity they were met by the financial crisis and most did not hold up well.

Is 'Set-It-and-Forget-It' Appropriate?
The original concept for target-dated funds and the subsequent marketing of these products are notably different than the reality that investors in target-date funds have experienced.
The impetus for the creation of these funds was to provide an option for people who did not have the interest or knowledge required to manage their investments with an option that would make the appropriate adjustments as they moved closer to retirement and as the landscape of the investment world evolved. Unfortunately the typical experience in these funds has been a static allocation that may not even have been appropriate when the fund was originally purchased.

I've Got How Much Equity Exposure?
The discrepancies in the structure of funds that are marketed to very specific audiences are appalling. For example, of the 152 target-date funds with a retirement target of 2025 the equity exposure ranges from a low equity exposure of 30.4% to a high of 79.7%; a differential of almost 50%. This disparity raises two notable questions; 1) which one, if either, is appropriate and 2) how many people that own a fund in this category actually know how much equity exposure their fund has?
I think it is safe to assume that neither extreme would be appropriate for someone who plans to retire in approximately 15 years. I think it is also safe to assume that majority of the people utilizing these funds do not perform the due diligence that they should, but simply pick the fund option that is most proximal to their planned retirement date. Don't be tied solely to the date that appears in the fund name, make the effort to research the fund's equity exposure and be willing to use another fund, if appropriate.

How Much Am I Really Paying?
In addition to the target-date universe having wide disparities in investment strategies, there are also significant variations in the costs between the funds. For example, in the same universe of funds with a target year of 2025, the annual expense ratios can range from 0.18% to 2.21%; to put that in perspective the roughly 2% differential on a retirement account valued at $250,000 translates into an additional $5,000 in annual expenses. Remember that there is nothing inherently wrong with paying a fee if you are getting a commensurate benefit; however, you need to be able to quantify your benefit relative to the cost.

What's Under the Covers?
Ferreting out how a target-date fund invests your retirement dollars is a difficult and time consuming process. The typical methodology for these products is to use a "fund-of-funds" approach, which means that each target-date fund is merely a collection of that fund family's individual mutual fund offerings.
In order to find our how a target-date fund is truly structured, you first need to have a thorough understanding of the structure of each one of the underlying component funds and then you must re-aggregate separate pieces in the precise portion that that they are utilized by the target-date fund.
Be aware that fund families may not use their best performing or least expensive funds when creating their target-date fund allocations. Often a fund family will utilize this venue as an opportunity to boost assets under management of newer, smaller or underperforming funds.

Trust, But Verify
As with most aspects of the investment world, things are not necessarily as they appear and should not be taken at face value. If you choose to use a target-dated fund, don't rely on the date found in the name of the fund, do you homework in order to determine if that fund will actually be appropriate for your situation.

Bradley R. Newman, CFP is from Roof Advisory Group, Inc., an independent investment management and financial advisory firm based in Harrisburg. The firm is a fee-only Registered Investment Advisor that provides portfolio management and financial planning services for individual and institutional clientele. The firm's email address is

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