Why haven't more target-date funds included a broader variety of investments? Wallman says mutual fund companies like to include funds from their own families in target-date funds, but they may not have broad enough asset-class choices. Also, funds with commodities or emerging-market securities tend to have higher expense ratios, which can be more difficult to justify. Their diversification benefits can be harder to quantify and demonstrate on a computer screen, Wallman says, so it becomes easier to go with the least expensive offerings even if diversification suffers.
Lastly, when target-date funds were first introduced, the intent was to make them simple, Wallman says. "Once they became part of the qualified default investment alternative for opt-out 401k plans and people started having their money invested in them without focusing on what the investments were, I think there was an obligation on the part of the industry to design them a lot better, but there's an inertia that said, 'We've got them, they seem to be working," and then offer what we've already had out there," he says.
Keeping funds simple and cheap are good goals, he said, but design flaws in target-date funds still need to be corrected.
-Dorothy Hinchcliff