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February 27, 2011

Target-Date Funds may not be what they seem to be.

Concerns about the use of Target Date Funds (TDF), also known as life-cycle funds, have been asked since they were introduced.  The U.S. Government Accountability Office recently issued a report, GAO-11-118, discussing some of these issues.  Wide variations exist in the structure, objectives and philosophies among the providers of these funds.  As a result the allocation to various asset categories; before retirement, at retirement and after retirement are materially different.  Other differences relate to the use of alternative assets and complex investment strategies. 
“Between 2005 and 2009 annualized TDF returns for the largest funds with 5 years of returns ranged from +28 percent to -31 percent.”  A February 16th article in the Wall Street Journal focused on the wide range of costs.  A table of TDFs with the highest and lowest average expenses reflected a range from 0.18% to 1.68%.  The 11 TDFs with the lowest average expense ratios ranged from 0.18% to 0.85%.  The 11 TDFs with the highest average expense ratio ranged from 1.18% to 1.68%.
“Fees are important because every dollar spent on investment management translates directly into lower returns.”
Since the long term returns may vary greatly, an investor must look into the details of the various funds.  An investor must determine among the alternatives TDFs that is closest to their financial needs, risk of loss, risk  of fluctuations, etc.
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