Comparing the Risks and Returns of “To ” versus “Through ” Target Date Funds

Most target date funds are THROUGH funds, as opposed TO funds. It’s important to know the difference between these two types of target date funds. In this article we compare and contrast the risks and rewards of these two approaches. An important distinction has been uncovered by the June 18 SEC and DOL joint hearings on target date funds (TDFs). Most TDFs are “THROUGH ” funds, designed to serve investors past retirement, to the grave. These funds would be best re-labeled as “target death ” or “lifetime ” funds, and the date in the fund name should be changed accordingly, perhaps using the investor’s birth date. It remains to be seen how the SEC will react to this need for clarification. Because THROUGH funds are designed for a lifetime they are somewhat aggressive at target date, with the average 2010 fund allocated 45 % to equities in 2008. This led to an average 25 % loss in 2008, which prompted the joint hearings. 2010 funds are earmarked for those retiring between 2005 and 2015. The majority opinion of the witnesses at the hearings is that THROUGH is the way to go because participants need to be protected against longevity risk, and fund companies know the appropriate glide path to provide this protection because they have run sophisticated computer simulations. THROUGH funds are the likely subjects of SEC and DOL rulings, which the industry is waiting for with great anticipation