Target-date funds: A retirement game changer?

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gkaplan
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Target-date funds: A retirement game changer?

Post by gkaplan »

Vanguard has posted a column on target-date funds:

https://personal.vanguard.com/us/insigh ... ger-062012
Gordon
dbr
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Re: Target-date funds: A retirement game changer?

Post by dbr »

I think this is a good news/bad news story.

Based on the data, TR funds are accounting for some shifts out of bad decisions, such as too much stock, too little stock, and too much company stock. That is good news.

I suspect the bad news is we now have an environment where employees think somebody is looking after their interests when that is no more true now than before and employees may understand their investments even less than they did before. I'm not sure the data would show that employees are making any less investing mistake than before; the debate is just shifted to a discussion of whether investment company decisions regarding appropriate portfolios are, in fact, good decisions.

I agree that employers are aggressively including and defaulting to TR funds as a fiduciary defense that is probably overdue. The actual execution . . . not so much.
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Cut-Throat
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Re: Target-date funds: A retirement game changer?

Post by Cut-Throat »

dbr wrote:I think this is a good news/bad news story.

Based on the data, TR funds are accounting for some shifts out of bad decisions, such as too much stock, too little stock, and too much company stock. That is good news.

I suspect the bad news is we now have an environment where employees think somebody is looking after their interests when that is no more true now than before and employees may understand their investments even less than they did before. I'm not sure the data would show that employees are making any less investing mistake than before; the debate is just shifted to a discussion of whether investment company decisions regarding appropriate portfolios are, in fact, good decisions.

I agree that employers are aggressively including and defaulting to TR funds as a fiduciary defense that is probably overdue. The actual execution . . . not so much.
The only bad news is that most employers don't offer target funds in their 401K plans.
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magician
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Re: Target-date funds: A retirement game changer?

Post by magician »

My experience in analyzing target date funds is that they tend to be inefficient; i.e., they tend to choose constituent investments that have quite high correlations of returns. Thus, these funds have too much return volatility for the level of return they provide.

I grant you that most individual investors probably couldn't do a better job (and, in fact, would likely do much worse if left to their own devices), but the fund managers are supposed to be experts in this stuff and they seem to fall woefully short of demonstrating what I, at least, would consider to be expertise.
Cut-Throat wrote:The only bad news is that most employers don't offer target funds in their 401K plans.
While that's certainly bad news, is isn't remotely the only bad news.
Simplify the complicated side; don't complify the simplicated side.
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Cut-Throat
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Re: Target-date funds: A retirement game changer?

Post by Cut-Throat »

magician wrote:My experience in analyzing target date funds is that they tend to be inefficient; i.e., they tend to choose constituent investments that have quite high correlations of returns. Thus, these funds have too much return volatility for the level of return they provide.
They Choose Index Funds mostly Centered around Total Stock, Total Bond, Total International, And Some TIPs.

I don't think I'd want them fooling with any thing else!

Still No Bad News!
Default User BR
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Re: Target-date funds: A retirement game changer?

Post by Default User BR »

Cut-Throat wrote:The only bad news is that most employers don't offer target funds in their 401K plans.
I'm not sure I agree with that. Most don't offer Vanguard TR funds, but some similar fund is pretty common. Whether they represent good choices is another matter. Too often they are composed of actively managed funds and have high ERs.


Brian
chaz
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Re: Target-date funds: A retirement game changer?

Post by chaz »

Nice link, Gordon.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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gkaplan
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Re: Target-date funds: A retirement game changer?

Post by gkaplan »

Thanks, Chaz.
Gordon
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Cut-Throat
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Re: Target-date funds: A retirement game changer?

Post by Cut-Throat »

Default User BR wrote:
Cut-Throat wrote:The only bad news is that most employers don't offer target funds in their 401K plans.
I'm not sure I agree with that. Most don't offer Vanguard TR funds, but some similar fund is pretty common. Whether they represent good choices is another matter. Too often they are composed of actively managed funds and have high ERs.


Brian
Yes, I see that it is changing since the last time I looked. My wife and I were never offered those options.
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Taylor Larimore
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Target-date funds

Post by Taylor Larimore »

Hi Gordon:

Thank you for the link.

My feelings about target funds (in tax-advantaged accounts):

Investors might do a little better--but they could do a lot worse.

And Vanguard has the best!

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
dharrythomas
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Re: Target-date funds: A retirement game changer?

Post by dharrythomas »

I agree with Taylor (could do a little better or a lot worse) except that the TSP Lifecycle Funds are pretty good also. More conservative than Vanguard but with a lower expense ratio.

My only complaint about Vanguard is that there are no Admiral shares once the account has $50K. If they can provide it for managed accounts, they can provide it in the TR accounts. It would have to be cheaper than managing my multiple admiral accounts (which I of course complicated by adding each of the value indexes) which I rebalance as I see fit rather than Vanguard being able to use cash flows to balance and reduce turnover.

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Re: Target-date funds: A retirement game changer?

Post by Beagler »

How can any investor in VG's Target Retirement Funds feel certain that their most important investing decision (the stock/bond ratio) will be left untouched, given Vanguard's demonstrated history of making significant changes? It's almost like a cat-and-mouse game: VG establishes an asset allocation, then it changes within a short time (apparently to keep up with the likes of T.Rowe Price, not for any seismic shift in portfolio theory). Then VG changes it again! Even Mr. Bogle questioned the shift in AA at the last BH reunion.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
beardsworth
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Re: Target-date funds: A retirement game changer?

Post by beardsworth »

Beagler wrote:How can any investor in VG's Target Retirement Funds feel certain that their most important investing decision (the stock/bond ratio) will be left untouched, given Vanguard's demonstrated history of making significant changes? It's almost like a cat-and-mouse game: VG establishes an asset allocation, then it changes within a short time (apparently to keep up with the likes of T.Rowe Price, not for any seismic shift in portfolio theory).
A good point. Changes have been made over time in the constitutions of both the Target Retirement series and in the Life Strategy series.

Regarding Target, I happen to think it was good--notwithstanding the current "troubles" in other parts of the world--to somewhat bump up the foreign stock component.

Regarding Life Strategy, I think it was a great idea to get rid of the dreadful Asset Allocation Fund (whose nature also meant that the stock/bond allocation within each Life Strategy fund was subject to constant change despite Vanguard's owned fixed allocations to the respective constituent funds themselves), but in the new "incarnations" of Life Strategy, I personally would have preferred to see a fixed income side which included some TIPS fund, and (in case of rising rates) at least a small dash of money market or short-term bond, instead of just Total Bond Market Index.

Anyway, as Beagler points out, the lesson so far is that the Vanguard allocation philosophy when a person first buys one of these funds may not necessarily remain the Vanguard allocation philosophy later on. By comparison, the makeups of balanced funds like Wellington, STAR, and Wellesley have been remarkably stable.
adave
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Re: Target-date funds: A retirement game changer?

Post by adave »

I certainly agree with the salient points above.

I would like to say, however, that the benefit of Target funds in my personal case was simple -- I tend to be my own worst enemy when it comes to investing.

I has taken me probably 10 yrs to understand this fact - that I cannot help tinker with and mess with my portfolio no matter how hard I try, which I think has cost me a little over time. The major benefit to the TR fund is that for a low cost I get a very nice (albeit not perfect) low cost broadly diversified portfolio that prevents me for over thinking and over tinkering with things over time. In the end, I think it will help save me from myself, and I will end up with far money money than if I continued on the the same path I was on. This more than makes up for the negatives to me.

If one has incredible levels of discipline, sure, the TR may not be appealing. But for people like me (and I bet there are a lot of us) it is super useful as it helps us stay the course and not make stupid, self-defeating decisions. I just set it and forget it.
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parsi1
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Re: Target-date funds: A retirement game changer?

Post by parsi1 »

I agree 100% with “adave”, his statement is completely true in my case as well.
Since a year ago I tried to time the market by shifting money between different funds. Finally recently, after help and inputs from Bogleheads, I switched to TRD2020. This has been the best move I have made and I will stay there and add to it every year until I retire.
Thanks for all the inputs from Bogleheads. My most valuable takes from this forum for the short time that I have been a member are:
1- Filter out the noise
2- Stick to your plan
3- Make it simple and rebalance
4- Mess is good don’t try to avoid it (I had a posting about the mess in Europe and this was the comment from a member)

Well if you can think of more you can add to it.
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