Really. You’ve got to admire their effort. But wasn’t it the ol’ Gipper who once said the nine scariest words in the English language are “I’m from the government and I’m here to help”?
In 2006, Congress passed the Pension Protection Act. One of its objectives was to address a huge problem with the way people invested their long-term retirement money. Too many workers placed their assets in short-term investments. Congress, with probably every legitimate financial advisor backing it, wanted to encourage folks investing for their retirement to go into equities for the long-haul. Foolishly, though, they specified certain financial products as “safe harbor” investments, including the now infamous target date funds.
So, just as equity markets were poised to peak in 2007, many unwitting 401(k) lambs were being led to the Great Target Date Slaughter of 2008/2009. In an exclusive interview with FiduciaryNews.com, Ron Surz, a much quoted expert on Target Date Funds and co-author of the new book “Fiduciary Handbook for Understanding and Selecting Target Date Funds,” explains what happened in that time period, why we’re doomed to repeat that same debacle and why it will be so much worse this next time. (You can read the full interview here.)
Ron thinks you can solve the TDF dilemma, although he doesn’t think regulators will be the ones to do it. I’m wondering, though, if his definition of the objective of a target date fund dooms it to fail. You see, Ron, and the many who agree with him, believe (and I quote from page 15 of his book): “Capital preservation is the universal objective of TDFs, the ‘perfect fit’ for the ‘one-size-fits-all.’ The Hippocratic Oath of TDFs should be ‘lose no money,’ It’s the one objective that we all have in common.”
Think about this “lose no money” objective. Can any mutual fund ever guarantee that it will lose no money? No. Even the “safest” mutual funds – money market funds – are required by the SEC to include language in their prospecti about the possibility of losing money.
This is the bitter fallacy of bond funds – and all mutual funds, TDFs, that contain bonds. They are not bonds. They are equities (by definition, all mutual funds are considered equities). Unlike bonds, mutual funds that hold bonds do not guarantee your initial capital investment will be returned upon some maturity date. In fact, bond funds have no maturity date.
And since we’re on the subject of dates, what exactly does the “date” on the target date fund mean? Ron certainly has a perfectly good answer, but, as he points out, unless and until the industry converges on a single answer, the investing public – including the corporate plan sponsors who are tagged with a fiduciary liability if they don’t know this answer – will remain confused and unsure.
This represents just the tip of the iceberg when it comes to the fine mess Congress wrought by singling out TDFs as an “approved” investment.
Yeah, they wanted to help back in 2006.
But you want to know the really scary part?
They want to help again
Source: Benefits Pro