‘To’ versus ‘through’ causes confusion in target funds

Re: the Retirement Watch column “How to compare target date funds” (Feb. 21), the words “to” and “through” were coined at the June 2009 joint Labor Department and Securities and Exchange Commission hearings on target date funds examining the losses of 2010 funds in 2008

Re: the Retirement Watch column “How to compare target date funds” (Feb. 21), the words “to” and “through” were coined at the June 2009 joint Labor Department and Securities and Exchange Commission hearings on target date funds examining the losses of 2010 funds in 2008.

Representatives of the fund companies who testified explained that they take substantial risk at the target date because their glide paths serve “through” the target date to death. “To” funds end at the target date.

The clear implication is that “to” funds are far less risky at the target date than “through” funds, but this isn’t true. The industry has defined “to” in a bizarre way — as a flat equity allocation beyond the target date.

This is unfortunate because the very essence of “to” is the nonexistence of “beyond.” A fund with 100% equity throughout its life is a “to” fund by this definition.

But let’s focus on what matters most: asset allocation.

Financial advisers should compare risk at target date by comparing glide paths. “To” or “through” tells us nothing, because a “to” fund could have 50% equities at target, while a “through” fund could have 20%.

Asset allocation is king. All of the other aspects of target date funds are just annoying noise. Investment policy should match the sponsor’s objectives, and advisers should be aware that the most common objectives don’t stand up to scrutiny.

Replacing pay and managing longevity risk are unrealistic objectives for one-size-fits-all target date funds. These objectives have been concocted as excuses for a lot of risk with a lot of fees.

Realistic objectives lead to much greater conservatism. For example, an objective of not losing participant money leads to no equity at target date. This all-safe endpoint is made even more sensible by the fact that most who are defaulted into target date funds withdraw their accounts at retirement.

“To” versus “through” is just another source of confusion in an already confusing product. The Labor Department, SEC and the Government Accountability Office have issued proposals that address this problem.

My hope is that these proposals will become mandates soon.

Ron Surz

President

PPCA Inc.

Target Date Solutions

San Clemente, Calif.