Target-date funds are capturing a growing share of assets in the U.S. 401(k) market, and the guess here is that it isn’t a good thing. My thinking on this subject was clarified after discussing it with two retirement experts—Research Affiliates’ Rob Arnott and Global Retirement Partners’ Bill Chetney—both of whom will be speaking at our retirement conference on or about the time you receive this magazine.

Their central thesis is that making age the dominant determinant of asset allocation in a world where longevity and lifestyles are changing rapidly is a major mistake. It would seem that target-date funds are an ideal solution for human resources executives looking for a turnkey solution to cover their tails—but ideal for very few others.

 Arnott believes that a traditional 60/40 retirement portfolio employed by pension funds, with some tactical flexibility and rebalancing, is a superior solution, though not an optimal one. Both he and Chetney think the glide path structure of target-date funds is problematic.

As financial advisors know, clients’ circumstances vary dramatically. A 56-year-old forced into early retirement who smokes two packs a day finds him- or herself in a very different situation than a 70-year-old with a lucrative part-time consulting gig who enjoys 10-mile mountain hikes.
Longevity is likely to be the single-biggest factor that wrecks the plans of those designed target-date funds. Today’s 60- and 70-year-olds are much younger in mind and body than yesterday’s.

 If one listens to investors in Singularity University like Ric Edelman and futurists like Google’s Ray Kurzweil and Peter Diamandis, they are predicting that some of today’s 60-somethings could live to 120. In reality, they only have to live until 105 or 110 to derail the plans of their financial advisors, not to mention the plans of the mutual fund executives who conceived target-date funds.

To borrow an old phrase from a famous movie, if millions of Americans start becoming centenarians, the problems facing financial advisors and mutual fund creators won’t amount to a hill of beans in this crazy world. But they will be right in the middle of it.

Evan Simonoff
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