Practical Applications of Target-Date Funds—Mis-Sold and Misused

In Target-Date Funds—Mis-Sold and Misused from the Winter 2023 issue of the Journal of Wealth Management, Rob Brown of Integrated Financial Partners finds that target-date funds (TDFs) do not live up to expectations—in fact, they harm investors by underperforming relative to 100%-stock funds over relevant time horizons. A key factor is time diversification, the process of spreading out frequent and roughly equally sized contributions and withdrawals over time during both the accumulation phase of an investor's lifecycle and during the withdrawal phase (i.e., retirement). TDFs are investment funds that have a specified end date and automatically reduce their allocation to stocks over time. TDFs are marketed on the premise that investors benefit from automatic reallocation to more conservative assets as they approach retirement, and federal law makes TDFs safe-harbor investments for company retirement plans. As a result, there are now trillions of dollars in TDF assets under management. Brown finds, however, that despite their popularity, TDFs significantly underperform a 100%-stock portfolio with time diversification over time horizons of 15 years or more.