Who's Watching?
A recent article in The Wall Street Journal’s, ‘Heard on the Street’* column discussed something that has been on my mind lately. The article, which appeared March 5th, 2024 indicated that three quarters of the large 401K plans administered by Vanguard automatically enroll employees into plans which default to investing in a ‘balanced’ strategy. According to the article, 98% of these participants in this group ultimately invest in target-date funds.
Target date funds are designed to automatically adjust asset allocation between stocks and bonds so that as one draws nearer to retirement, the allocation becomes more conservative. That sounds great in theory but, as the article pointed out, the funds have historically been slow to adjust their portfolios. This can be costly, in particular when market behavior warrants some opportunistic change. The article suggested that actively managed target funds are, in reality, passive investments.
I gained another perspective on target funds just this week. A new potential client asked Courtney and I to review her portfolio. During the review I asked how often her advisor had made changes. She couldn’t remember the last time a change had been made. Sadly, I already knew that answer because there, amongst the other investments, was a target-date fund with a target date of 2020.
It would be easier for investors and advisors alike if there were indeed a set-and-forget strategy. Turns out there isn’t one and time and data is proving that sometimes, even investments with active names turn out to passive if no one is paying attention.
Opinions expressed in the are those of the author and are not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Diversification and asset allocation do not ensure a profit or protect against a loss.
* https://www.wsj.com/finance/investing/is-your-401-k-destroying-capitalism-87ccb9ce
