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Innovation in the retirement plan space is revolutionizing saving and investing, leading to better outcomes and better participant behavior. Target-date funds are no different, making it easier for workers to stay on track, especially during market shocks.
But are some fund companies and their managers exploiting investor apathy for their own benefit?
Yes, according to Michael Finke. Professor Frank M. Engle, professor of economic security at the American College of Financial Services, estimates that more than 60% of employees currently participating in retirement plans use TDFs to save. He said that
A study with PGIM’s David Blanchett found that “employees were less likely to contact record keepers during the coronavirus crash in March 2020, and more likely than self-directed investors to contact record keepers at the wrong time. They were far less likely to withdraw their money from stocks.”
Although TDF encourages employees to ignore retirement investments, he said this is generally a good thing because employees who manage their own investments tend to underperform. .
However, some fund families seem to recognize that TDF investors rarely change their investments.
“This creates an opportunity to manage the TDF in a way that is not in the best interest of the participants because the participants are not monitoring the manager’s actions,” Finke says. “[We] For example, we found evidence that fund families used TDFs to buy shares in poorly performing funds within the same family. If an underperforming fund has large outflows, the TDF will step in and buy the shares. ”
Also, the fact that TDF is a fund of funds may cause people to underestimate the total fees paid to both the TDF and the underlying fund.
He added, “We found that TDFs tended to underperform other balanced funds. PPAs led to more TDFs being used as default investments, making the underperformance even worse.” . “Most importantly, if fund investors are not careful, there is an opportunity for some fund families to take advantage of unwary investors.”
He pointed to Blanchett’s recent LinkedIn post noting that the largest TDFs are among the most efficient and low-cost investments available to individual investors. He also said the TDF market is increasingly concentrated on these low-cost providers.
However, he added, “Most importantly, consultants and plan sponsors should be aware of the potential for abuse in some TDFs and conduct due diligence to ensure that the TDF they choose is competitive.” “There is a need,” he concluded.
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