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• As illustrated above, a 2050 fund can, in the wrong year, ravage a participant’s account.  This experience can affect a participant’s willingness to invest for the remainder of their career and may drive them back to the stodgy, low yielding money market and stable value funds that target date funds were meant to replace.
• The standard deviation of the S&P 500 over a 30 year period is a little over 15.  The return for that same period is nearly 12% -- meaning that the expected range of returns in a given year is as high as 27% or as low as negative 3%¹.  These numbers provide quite a bit of comfort unless you examine the same figures over the most recent 3 year period where the standard deviation is over 20 with a return of a NEGATIVE 4% -- meaning that the expected range of returns in a given year is as high as 16% but as low as a NEGATIVE 24%¹.  Interestingly, the standard deviation of 2050 funds over the same 3 year period is 21.3² – significantly higher than the standard deviation of the S&P 500.
• The average employee has a several different careers over the course of their working years.  In each of these careers, the employee likely works for more than one employer (one study by the Bureau of Labor Statistics found that employees had over 10 jobs before the age of 42).  In the face of these statistics the target date approach envisions a single employer offering a single series of target date funds (of which each employee chooses one for the duration of their career and, in the math behind many target date funds, their life).  There is no “standard” for the construction of a target date fund, and one series might have 30% in stocks in their 2010 fund while the next has 70%.  The idea that an employee will utilize a single strategy throughout their career/lifetime does not reflect reality.
• The target date approach attempts to address the asset allocation issue but does not, by itself, impact the larger issue of the saving’s rate.  A 22-year old who selects a 2050 fund this year may, if they understand the risk, successfully address their asset allocation, but it does not solve the fact that this employee has chosen to save 3% a year of their salary – a figure that produces few, if any, successful retirements.

1  Returns and standard deviation figures were calculated using Zephyr StyleADVISOR software for the period ending March 31, 2010. Past performance is not a guarantee of future performance.

2  Standard deviation figure reflects the Morningstar Target Date 2050+ benchmark. Calculation utilized Zephyr StyleADVISOR software for the period ending March 31, 2010. Past performance is not a guarantee of future performance.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb's first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.