Page 44 - Investment Advisor July/August 2021

Conclusions

RETIREMENT PLANNING
By Ginger Szala

Target Date Funds: A ‘Time Bomb’ in a

Retirement Tool for the Masses?

The GAO will investigate target date funds. What does that mean
for the multitrillion-dollar industry?

at the American College of Financial
Services, who wrote a 2013 paper with
Michael Kitces on the topic, Reducing
Retirement Risk with a Rising Equity
Glidepath. “Different companies end up
offering very different target date funds,
and it becomes random about whether
the target date fund in one’s 401(k) is on
the conservative side or the aggressive
side,” Pfau said. “This exact issue came
up after the 2008 financial crisis, where
some 2010 target date funds lost more
than 40% in 2008, and it’s not necessar-
ily what people expect with these.”
And that’s a main reason that the
letter in early May from the research and answer 10 detailed ques- HELP Committee requested the GAO
Senate Committee on Health, tions on TDFs. report. In its letter to the GAO, it stated:
A Education, Labor and Pensions And that’s not the only recent devel- “The employer-provided retirement sys-
to the Government Accountability Office opment in the TDF space. On May 24, tem must effectively serve its participants
requesting that it conduct a review of one of the largest TDF managers, T. and retirees, and we are concerned cer-
target date funds raised some eyebrows Rowe Price, announced a fee cut across tain aspects of TDFs may be placing them
in the retirement industry. Assets in its suite of TDF products. The reduction, at risk. TDFs are often billed as ‘set it and
these funds, a popular qualified default effective July 1, averages 6.3 basis points forget it’ investments, yet expenses and
investment alternative for workplace across mutual funds and 4.8 basis points risk allocations vary considerably among
retirement plans, have grown to about across trusts. Meanwhile, on June 1, cur- funds. The millions of families who trust
$1.5 trillion in roughly 15 years. Some rent and former employees of Northern their financial futures to target-date
project the number to be as high as $2.5 Trust filed an ERISA lawsuit against funds need to know these programs are
trillion including private accounts. their firm, accusing it of loading up its working as advertised and providing the
The letter, dated May, 7, from Sen. retirement plan with proprietary TDFs retirement security promised.”
Patty Murray, D-Wash., chair of the that underperformed similar offerings Meanwhile, the GAO has responded
HELP Committee, and Rep. Bobby Scott, from other fund managers. that it will proceed with the study. That
D-Va., chair of the House Education and TDFs have “been an ongoing said, one source was told it could take as Adobe Stock
Labor Committee, asked the GAO to issue,” said Wade Pfau, professor much as a year and a half.

42 INVESTMENT ADVISOR JULY/AUGUST 2021 | ThinkAdvisor.com