"Folks are being defaulted into these target-date funds," said Ron Surz, developer of a target-date series called the Safe Landing Glide Path, which moves investors' assets entirely to Treasury Inflation Protected Securities, or TIPS, by their projected retirement date. "They think their employers are looking out for them, but they're just flipping their assets into what's convenient."
In 2008, some target-date funds designed for those near retirement lost as much as 41 percent while the S&P 500 Index fell about 38 percent, according to Morningstar. Since then many providers have diversified their holdings and added asset classes to protect against inflation and falling markets.
Providers including JPMorgan Chase & Co., AllianceBernstein Holding LP, Northern Trust Corp. and State Street Global Advisors have increased allocations to inflation-sensitive assets including real estate investment trusts, commodities or TIPS. Last quarter Fidelity also tacked on floating-rate debt and real-estate debt as asset classes, said Joe Cullen, institutional portfolio manager at the Boston-based firm.
The proliferation of investment choices has made it harder for employers to shop for the best plans.
"It's getting more and more difficult for employers to vet target-date funds," because there are so many variations with little track record, said Mark Wayne, CEO of Freedom One Financial Group. It's especially tough for small businesses with fewer resources, said Wayne, whose Clarkston, Michigan-based firm advises companies with 100 to 1,000 employees on 401(k) plans.
Companies must show they've made a good-faith examination of their investment offerings in order to avoid liability under Department of Labor rules, said Wayne.
"The problem is, if you take the wrapper off and you look at the underlying funds in the target-date fund, some of those will fail any investment screening," he said. Businesses should push for target-dates that are comprised of funds from different investment managers to get the best returns for their workers, he said.
"This is going to be their sole retirement vehicle," said Robin Diamonte, chief investment officer for United Technologies Corp., which uses a customized target-date fund as the default investment when automatically enrolling new hires in its 401(k) plan. "We think it's extremely important to get it right."
The maker of Sikorsky helicopters and Otis elevators has about 100,000 participants in its 401(k) plan with about $16 billion in assets, of which about $1 billion was held in target- date funds as of January.
Workers may be better off with a so-called balanced fund that has 50 percent to 60 percent in equities and 40 percent to 50 percent in bonds because target-date funds generally have more moving parts and higher fees, said Pozen of the Harvard Business School.