“Ten years ago, a target-date fund manager had one series of funds,” Mr. Holt said. “Now there are 40 firms offering 58 target-date series, with quite a few offering more than one series.”
PASSIVE MANAGEMENT
An easy way for fund companies to broaden their target-date lineup is to offer a suite of TDFs that use all passively managed components, with low costs and high reliability.
Fidelity offers the Fidelity Freedom target-date series as well as the Fidelity Freedom Index series. Others, such as Principal, offer a mix of active and passive TDFs. And Natixis Global Asset Management recently rolled out a suite of funds that follow environmental, social and governance precepts, the Natixis Sustainable Future Funds.
But target-date funds of any stripe have several drawbacks, which advisers are quick to point out. First, investors often don’t use them properly.
Nearly half of all TDF users also invest in another asset class, said Winfield Evens, director of investment strategy at Alight Solutions. Doing so undermines the purpose of a target-date fund, which is to be a one-shot fund for retirement.
“Only 9% knew that a target-date fund rebalances over time, and that you only need to invest in one fund,” he said.
Other evidence shows that investors tend to outgrow target-date funds. “New folks who are defaulted in don’t have a complex life; it’s an easy choice.” Mr. Evens said. “But a 45-year-old doesn’t have an easy financial plan.”
Not surprisingly, those who are fully invested in target-date funds have an average balance of $26,000, versus $137,000 for those who are not invested in target-date funds at all.
Another reason investors leave target-date funds may be the ongoing bull market. When the Standard and Poor’s 500 stock index has gained 15.4% a year for the past five years (including dividends), a 2020 target-date fund’s average gain of 10.8% may seem a touch disappointing, no matter how well it did on a risk-adjusted basis.
“People forget what a bear market feels like,” Mr. Nefouse said.
Because so many investors abandon target-date funds once they accumulate wealth, some advisers don’t recommend them.
“Typically, I don’t [recommend TDFs] because most people end up paying for something that they will never use,” said Eric Dostal, an adviser at Sontag Advisory. “By that I mean individuals typically are not invested in a target-date fund for long enough to take advantage of the glide path.”
1,488number of smart-beta mutual funds and ETFs, up from 655 in 2012
But that’s not the only reason some advisers shy away from target-date funds. Part of it is professional pride: They figure they can create a better, more custom-fit portfolio for their clients than one tailored for a generic person whose retirement date falls within a five-year range, even those TDFs that involve smart-beta strategies.
“If I’m looking at it from an RIA’s point of view, are target-date funds what I’m going to use? Quite probably not,” Mr. Evens said. “I’d feel that I have tools and skills that are better.”
Sterling Neblett, founding partner at Centurion Wealth Management, put his concerns about TDFs this way: “Although target-date funds are an excellent choice for your typical nonprofessional investor, they do come with limitations and lack of customization,” he said. “Most target-date funds are comprised of one company’s funds, which may not have the top managers in each of the asset classes.”
