Target Date Funds, Mis-Sold and Misused

Target Date Funds (TDFs) are portfolios with a pre-defined end date, the so-called “target date,” and the essential attribute that they reduce their allocation to stocks with the passage of time. The proposition upon which TDFs are both sold and bought is that investors benefit from the consistent reduction in portfolio risk as investors progress toward the end of their applicable investment time horizon. The manufacturers of TDFs have a clear and unambiguous motivation to develop an appealing story and associated product that encapsulates said story, so as to grow their assets under management. The pension plan sponsor’s motivation is to provide investment options that protect it from regulatory and litigation risk. Unfortunately, the data offer a different reality. The data support the conclusion that investors are harmed by the use of TDFs when sufficient time diversification is present, resulting from a sufficient number of relatively equal-sized contributions and/or withdrawals evenly dispersed over time. Specifically, the analysis shows that 1) the use of precious metals remains unattractive for investment time periods of 12.5 years and longer, 2) optimal starting allocations of 100% stocks remain preferable for investment time periods of 5 years and longer, and 3) the use of TDFs remains significantly harmful to investors’ wellbeing for periods of 15 years and longer. The causality driving these results is both simple and straightforward. First, bonds and precious metals impose a severe return penalty on the investor. The geometric mean returns are −72% and −87% proportionately lower than for stocks, respectively. Second, bonds and precious metals impose extended (many decade-long) episodic eras of negative returns, unlike stocks. Third, time diversification applicable to circumstances where contributions and/or withdrawals of relatively equal size occur over extended time periods and with high frequency make the use of bonds, precious metals, and TDFs purely redundant and non-contributive.