By CHUCK JAFFE
The average investor using a target-date retirement fund didn't pick the fund because of its "glide path" or the asset allocation it will have when they reach retirement age.
In fact, the average investor probably doesn't know either of those things.
They picked the fund -- or allowed their employer to use it as a default choice for them -- because it was in the company's retirement plan and offered the promise of keeping the investment process simple.
Meanwhile, the fund industry has been arguing over which approach is best, with every player suggesting that their methodology is tops and that the consumer can't possibly be satisfied with what the other guy is offering, or that they will be shocked at the outcome of some competitor's approach.
The ends may be shocking all right, but that would have a lot more to do with what happens on the stock market and in the economy than with the differences between different types of life-cycle funds.
Target-date or life-cycle funds aim to be one-for-a-lifetime decisions, where the investor buys a portfolio that is adjusted over time to become more conservative as the shareholder ages. That said, there's a big question in the industry over the proper "glide path," whether the fund is built to land at retirement age, or to stretch out the landing for the rest of their lives.
To tell you how confusing it has gotten, consider that Morningstar Inc. has almost 50 different categories of target-date and life-cycle funds. The primary distinction in those groups is the retirement year it is built around, but the underlying truth is that what was built to be a simple, straightforward decision becomes increasingly complex as competition to capture target-date assets increases.
The U.S. Securities & Exchange Commission has been looking at target-date issues for a few years and is now in the home stretch on some regulatory proposals that purport to improve disclosure.
The problem is that the fixes actually make things more confusing, particularly for the average person who picks these issues more by default than design.
The most significant change would require funds to include in its name, and all advertising, a description of its allocation when the target buyer reaches retirement age. Thus, you could have the 2040 Bligenbluff 40/50/10 fund; in plain English, that means that when the hypothetical Bligenbluff fund hits 2040 -- when its shareholders would be planning to retire -- it would hold 40% stocks, 50% bonds and 10% cash.
So an investor could be choosing between 60/40, 50/50 and any other permutation of funds that some firm thinks will sell.
For the average investor, however, it's poppycock. They can't tell the difference.
If the average investor felt strongly about having a 40-50-10 allocation at retirement age, they wouldn't use a target-date fund, they would build a portfolio themselves.
Further, judging a fund's worth based on its allocation at the target date is silly. It's a bit like a roller coaster taking souvenir pictures of riders as they leave the station; every rider is happy, but it's how they feel at the end of the ride that counts.
A disclosure in the fund's name says nothing about where the fund is positioned years ahead of the target date, or how it will get from now until then. It also oversimplifies asset-allocation; it's not just the "40" or "50" that counts, it's if that number represents domestic or foreign, large-cap or small, etc.
The people who want and need that information go get it; they don't buy target-date funds. The average used of a life-cycle fund wants to feel they have an asset manager who will take care of them and help them reach their retirement goals safely; they may understand that two funds can have the same bull's-eye and take different shots to reach it, but all they really care about is that they are aiming at and reaching the right target.
The SEC would be wise to ditch target years in favor of target ages, and allocation numbers for investment styles. Thus, the "Bligenbluff 50 Conservative" would be for a "50-year-old conservative investor" and would then provide a standardized description of the glide path the fund follows. Every five years, the fund's age number would switch automatically, so that you it's Bligenbluff 55 Conservative when the core shareholders reach 55.
Same fund, same plan, let the name age with the shareholders.
That doesn't help funds get marketing advantages or say their glide-path or concept is better, so it probably won't fly with regulators. Instead, they will make things more complicated, which just gives them the legal loopholes necessary to wriggle off the hook when funds get in trouble.
For investors, the moral of this story is a simple one: Look under the hood, as all target-date funds are not created equal. That said, if you don't like what you see there, chances are you will have to decide whether to settle for a fund that makes you nervous -- because so few retirement plans have more than one option per age group -- or doing your own allocation plan.