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The Trouble With Target Funds
This story appears in the June 23, 2013 issue of Forbes.
Note: I have updated this story with the addendum at the end.
Whoever invented target retirement funds, the portfolios that automatically turn more conservative as you age, must be some kind of marketing genius. There are 2,019 of these things on Morningstar, if you count all the share classes. The category has swallowed 13% of 401 dollars.
Whoever is buying the funds would not be at the genius level. They have not figured out that they are getting ripped off.
The sales pitch goes like this: When you are young, you can withstand a lot of investment risk and your portfolio should have a high dose of stocks. When you are old, you should have half or more of your savings in bonds. So the fund sets your portfolio on a 40-year “glide path.”
The image conjured up: In your bold youth you soar to the heights. As you turn 67 you coast into a worry-free retirement where, to judge from the photos used in ads, the main activity is fishing with your grandson.
The problem with target funds is that they carry stiff expense burdens. Let’s illustrate this by picking on BlackRock, whose LifePath 2040, intended for a saver who is now 40 or so, is typical of the genre. The prospectus discloses that your projected ten-year expense bill totes to $2,478 per $10,000 invested.
Addendum: BlackRock notes that it offers low-cost target funds as well. Its LifePath Index 2040 has an expense ratio of 22 basis points.
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