Target-date funds have been taking a beating lately, with some of the noise coming from everyone who isn’t TDF and other attacks from those advocating for individual level model portfolios in 401(k) plans. While target-date funds may not be perfect, they offer a great solution for most plan participants who, let’s face it, have little or no desire to become asset allocation experts.
In a recent blog post, Ode to the Lowly Target-Date Fund, Darla Mercado did a nice job of outlining some of the best characteristics of TDFs for 401(k) participants
- “They can save you from your own crappy stock picks.”
- “Your asset allocation is outsourced to an expert.”
- “Done right, they can give you diversification for cheap.”
Much of the TDF criticism, though valid, misses the real effect of TDFs. Overall levels of asset allocation inside 401(k) plans is much better than it was prior to the advent of TDF’s. Many more people have age-appropriate allocations than ever before. This is all good.
To the extent that the TDFs are too expensive, inappropriate for a plan’s participants or an individual participating in a plan, we can easily offer alternatives that are cheaper, a better fit for the population and individual level investment advice. Get the right TFDs for the plan and offer an alternative for those (few) in your plan who care or need to design their own asset allocation.
Doing anything else is a classic example of “perfect being the enemy of the good”.