Morningstar took a good look at target date funds recently, and listed the pros and cons of these controversial investments. The study looks at returns, fees, philosophy, and more in hopes of identifying the best target date funds and best ways to build them.
They end up straddling the fence between those who’d like to burn target date funds at the stake, and those who think they’re good enough as is.
Ultimately, the report may show that it doesn’t matter much which one you use. If we agree that investor behavior is more important than investment selection, than that’s no surprise. Even if you pick the best fund, you can be disappointed.
Good behavior includes having some understanding of how your fund works. There’s no real standard for these things, so a 2015 fund (which you might guess is a conservative one) can have anywhere from 36% to 84% in stock! 84% is usually not considered in the same zip code as conservative. It might be perfect – or it might not – but it’d probably surprise most investors.
Shining a Light
The study acknowledges that it isn’t taking a stand on either side of the target date fund debate. That’s OK. We’ve got more information, and that can only be a good thing for everybody involved.
More scrutiny led some target date funds to lower fees. Increased scrutiny means they’ll have to be even more competitive – not just in fees, but in a variety of ways that should benefit consumers.
These things are like vital organs; they’re supposed to do a good job by themselves and we don’t want to think about them unless something is wrong. They’re made for people who don’t or won’t spend all day messing with their investments.
Fund A or Fund B?
For most people, saving and investing is more important than picking a target date fund. Even worrying about strategy and philosophy may be a waste of time. The Morningstar study didn’t find huge advantages in active/passive, open/closed architecture, or other areas marketing campaigns hammer on.
Granted, the study is young so in future years the advantages may emerge. However, I doubt you’ll ever hear a retiree on the golf course say “I’m sure glad my target date funds were passively managed, otherwise I’d be eating dog food.” Now, you might see this on a commercial…
Look at today’s retirees; can you imagine one of them saying “I’m glad I had the stockpickers at American Funds instead of those silly Vanguard funds”? The only reasonable thing a successful retiree can say is: “I’m glad I saved and invested wisely”.
If they’re honest they’ll probably tell you they didn’t really look at – much less understand – exactly how the funds worked.