Target Date Funds: The Investor’s Diet Pill

Folks wanting to lose weight have much in common with people trying to save enough for retirement. Both get bombarded with often conflicting advice, and many are desperately seeking an easy solution to a complex problem.

For those looking to lose weight, the simple solution being sold is the diet pill—you take one every day, eat what you want, and magically lose weight. For the retirement investor, the simple solution being sold is the Target Date Fund—you just pick the year you plan to retire, contribute a portion of your income every paycheck, and you will have all the money you will need to retire comfortably once that magic date comes to pass. Simple.

But sadly, we all know how ineffective, and potentially dangerous, diet pills can be. They may help initially, but soon they stop working, leaving us victim to nasty side effects and ultimately very little progress towards our goal of losing weight.

For retirement investors, experts now agree that Target Date Funds pose a similar kind of risk. In a thought-provoking feature for US News and World Report this summer, Richard Davies, head of defined contribution for Alliance Bernstein (AB), Rob Austin, director of retirement research for Aon Hewitt, and our own Kevin Coppola, CEO of Compass Investors, uniformly question the wisdom of the set-it-and-forget-it "hands-off" strategy of Target Date Funds.

Instead, they advise investors to diversify their overall investment approach with different investment strategies. Since historically, the investment return on Target Date Funds has trailed the rates necessary to accumulate a nest-egg large enough to provide complete retirement income security, the experts are arguing that some percentage of every portfolio—even during retirement—must be kept responsive to what the market is doing.

So, for those of you still wanting to use diet pills to lose weight, go ahead—but don't ignore healthy eating and exercise. Likewise, if want to have that comfortable retirement and also invest in a Target Date Fund, remember to complement that by keeping a portion of your portfolio market-focused at all times.

— Kevin L. Coppola, President, Compass Investors, LLC

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