“Target-Date” Funds May Miss the Mark

Wall Street and the mutual fund industry have cooked up a veritable mish-mash of a product and stuffed it into many workers’ retirement plans. Called “target-date” or “age-based” funds, the funds over time hold different amounts of stocks and bonds in order to meet and pay for the investors’ long-term “target”–typically retirement or the start of college.

In theory, this sounds great. As the worker moves towards retirement, or junior gets ready for college, the amount of stocks and bonds in the portfolio shifts, with less allocated to stocks and more to bonds. As the allocation shifts, the portfolio’s risk and return will also decline, leaving the investor with a healthy and secure nest egg. This sounds like a thoughtful, conservative approach to investing to meet long term goals over a 20- or 30-year time period.

But in practice, some target-date funds may be just another Wall Street chimera, a foolish fantasy of marketing and salesmanship. As we’ve seen, Wall Street time and time again cooks up products its brokers then sell as whiz-bang market beaters. (Remember the auction rate securities debacle? Auction rate even rhymes with target-date!) In the end, whiz bang Wall Street products often times leave investors in the lurch.

Some financial planners, the most conservative investment advice givers in the industry, have serious reservations about target-date funds. “The pre-determined asset allocation might not be appropriate for a particular investor,” wrote Jim Schlager, a certified financial planner with Moss Adams Wealth Advisors LLC. For example, an 18-year-old’s age-based 529 account may be invested entirely in cash because he’s entering college, Mr. Schlager notes. That means the student’s account may be missing out on the returns that a bond fund can generate over the next four years of college.

There are three major problems with target-date funds, contends Paul Petillo, a writer who focuses on retirement issues. First, mutual fund companies don’t offer their best funds in the product. That’s because, second, target-date funds are most heavily used in 401(k) plans and used by the auto-enrolled, typically a new hire who doesn’t have a clue about how the 401(k) works. And third, many retirement plans have a limited amount of investment product offerings, so the worker has very little choice and is stuck with what’s in the plan.

One more potential red flag about the product: In 2008, many target-date fund investors, including those who were planning to retire shortly, found out that their fund was overly invested in equities, noted Mr. Schlager, the financial planner.

Sounds like Wall Street and the mutual fund industry need to straighten out this target-date mish-mash before investors are harmed by financial engineering, yet again.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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