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Robert Powell's Retirement Portfolio

Jan. 26, 2022, 12:00 p.m. EST

What happens if you pick the wrong date on your target-date fund?

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By Robert Powell

On paper, it seems easy enough. You pick the target-date fund that best matches your anticipated year of retirement and then you sit back and watch your account balance grow till you call it quits.

The problem, however, is this: You’re underestimating by 4.8 years how long you’ll be in the workforce and, as a result, you’re investing in the wrong target-date fund.

And it’s costing you money, according to a new research report, Missing the Target? Retirement Expectations and target-date funds .

How much is it costing you? On average it’s 4% or 0.2% a year, according to the authors of the paper, Byeong-Je An, an assistant professor of finance at the Nanyang Business School at Nanyang Technological University and Kunal Sachdeva, and an assistant professor of finance with the Jesse H. Jones Graduate School of Business at Rice University.

So, what might you do, given An and Sachdeva’s research?

The obvious answer is this: Instead of investing in the target-date fund that you think best matches your anticipated year of retirement, consider investing instead in the one five years after your anticipated year of retirement. For instance, invest in the 2035 fund instead of the 2030 fund or the 2050 fund instead of the 2045 fund.

By doing this, you’ll avoid having a shortfall in future wealth.

But does this make sense to those who eat, breathe and sleep all things target-date funds?

Not so much.

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If it ain’t broke

“I think that target-date funds, along with automatic enrollment, have been two of the most positive retirement plan innovations of the last decade,” said Mike Webb, a senior financial adviser with Captrust. “Thus, I am always a bit suspicious of anything that tampers with their basic fundamentals, such as changing the target date to one that is well, not actually the target.”

In most plans moving five years beyond the participant’s actual retirement will increase one’s equity position at all ages, in the case of a through-retirement fund, and at all preretirement ages, in the case of a to-retirement fund, said Webb.

“Since those who create glide paths do give a lot of thought to the subject, and those paths have worked historically even through volatile markets; I would adhere to the mantra ‘if it ain’t broke don’t fix it’ with respect to such a time horizon change,” he said.

It might not be broken, but one’s target-date fund might need a check in, said Jack Towarnicky, an employee benefits expert who is of counsel at Koehler Fitzgerald. 

“Many target-date funds maintain equity allocations in excess of 50% through the target date and beyond,” he said. “So, while the (researchers don’t) offer a solution, one practical option would encourage workers to perennially check on the underlying investment allocations, update their anticipated benefit commencement date — not their employment end date — and adjust as necessary.” 

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