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Target-Date Investing: Ten Investment Mistakes Wall Street Hopes You Make

Part One: Are You Giving Away Your Power to the Retirement “Experts”?

This week, we continue with our series on target-date funds. We began by looking at their history, growth and popularity in “Target-Date Funds: Why Have Investors Gone Wild for Auto-Pilot Mutual Funds?” Next, we examined what went wrong with target-date funds in “Target-Date Funds: Wall Street’s Betrayal of Main Street Investors.” This week, we continue by looking at the big mistakes that many target-date funds (and most 401(k)’s in general) encourage investors to make.

Mistake #1:  Give Up Control of Your Money

Assume it’s too complicated. Get overwhelmed. Hand your money to someone else to manage. They’re the experts, right? They know what they’re doing. (Right!?)

It seems impossible that the average investor could do half as well as a professional money manager, until you realize that most professional money managers can’t beat a dartboard or a monkey picking stocks.

But the problem goes deeper than mutual fund results and stock market risks.

Target-date funds promise to be safe and diversified (even if they are neither), your one-stop, all-purpose, only necessary investment. Some have performed as intended, many have not, but the real danger in TDF’s is not a disappointing rate of return – it’s the mindset and habits they encourage.

Instead of nurturing financial curiosity and confidence, target-date funds foster dependency. TDF’s train young investors to put their dollar as well as their decisions in someone else’s hands. Trained to be reliant on “money managers,” most will never learn how to leverage dollars, build equity, start a business, invest for themselves, buy a rental house, or collateralize the cash value in a permanent life insurance policy.

Instead of learning to control and use their own money, young investors learn to depend on money managers who want to control their dollars for them, not just until they stop working full time, but for the rest of their lives. (Hence the new rhetoric of target date fund managers, educating investors that the funds are for managing funds “through” retirement, not “to” retirement. And unfortunately for investors, those “through” retirement target-date funds have experienced high volatility and low returns.)

The message from Wall Street is loud and clear: “Give us your assets. All of them. Have you heard that you shouldn’t have all your eggs in one basket? That you need to hedge your risk, or balance your portfolio? Now target-date funds do all that for you! We’ll even automate the process so all you have to worry about is giving us the money. (Do read the fine print however… no results or retirement income is guaranteed.)”

Keeping CONTOL of your money is one of the 7 Principles of Prosperity, and it’s the first thing that target-date investors surrender. Read more about this principle in our article, “Are You Losing Control of Your Assets?

Mistake #2:  Substitute target-date funds for financial advice.

One Size Fits All… doesn’t it? Promising to be an all-encompassing solution, target-date funds offer the illusion of financial advice and management while actually providing neither, at least, not from the position of a fiduciary who represents the investor’s best interests. TDF’s offer one path for everyone in a particular age group, whether or not it makes sense for a particular investor, market, or year.

Target-date funds can’t consider the total picture of an individual investor. They pay no attention to your income, net worth, comfort with risk, expertise, other investments, or anything other than the approximate year you wish to retire (or worse, the year you were born, as if all 50-year-olds need the same strategy.)

And as we examined last week in “Target-Date Funds: Wall Street’s Betrayal of Main Street Investors,” even target date years themselves have become meaningless, as fund managers have increasingly adopted strategies that make no sense for middle-aged Americans who wish to keep their retirement dollars safe.

Increasingly, investors delegate their biggest financial decisions to experts who have never met them. And we don’t think this is a good trend. By their nature, TDF’s feature standardized designs and generalized investment advice, yet individuals have specialized needs.

A revealing CNN.Money article, “The Truth Behind Target Date Funds,” put it this way: “The employers who design the 401(k) menu and the fund managers who set the asset allocations are, together, many Americans’ de facto financial planners.” (And perhaps you have to add Congress, the Department of Labor, and the lobbyists who influence and control policy to that list.)

Worse yet, 401(k) contributors have severely limited choices. CFA and financial writer Tom Brakke laments in his article, “Way Off Target” those within plans are usually stuck with one choice and increasingly find the initial selection made by default based upon their age. Their chances of meeting their real targets for the future may be lower than they think, creating a problem for them and for the industry now pushing products that promise more than they are likely to deliver.”

Mistake #3:  Receive “advice” from people with little-to-no training in retirement planning.

While the average 20-something may not need a financial advisor, perhaps the real problem is that if they are employed, they are already getting “financial advice” through their employer, that may influence them for many years to come. And many employees often don’t understand the difference between:

  • a 401(k) plan Administrator (who is in charge of paperwork, filing, marketing-based financial “education,” and other tasks.)
  • Human Resources staff (trained in hiring, staffing, managing employee conflict, and employee benefits. In some companies, HR staff administrate the retirement program.)
  • a brokerage representative (who is a mutual fund salesperson educated on a specific company’s products), and
  • a Registered Investment Advisor or Investment Advisor Representatives. (These are actual Financial Advisors who are trained, educated, licensed and qualified to give financial advice from a fiduciary platform.) LINK

An Investopedia.com article articulated the problem in an article, “Is Your 401(k) Plan Administrator Competent?“…while the level of participation may have increased, the level of service and advice available for many employees often remains woefully inadequate…. Indeed, many office manager and human resources personnel who handle 401(k) plan administration have virtually no formal training of any kind in retirement planning.”

Receiving financial advice from HR personnel, 401(k) plan administrators and brokerage salespeople is the equivalent of seeking a medical diagnosis from a pharmacist, a manager who runs a pharmacy, or a pharmaceutical sales rep. And yet, it is the only financial advice that many Americans get. (And Wall Street loves this!)

(Remember – it’s harder to fleece an informed investor.)

Stay tuned for part 2 of “Target-Date Investing: Ten Investment Mistakes Wall Street Hopes You Make.”

Can You Really Trust Wall Street with Your Money? Recently No-BS Money Guy Todd Strobel invited Partner for Prosperity’s Kim Butler to discuss this question on the Guide to Financial Peace Radio. Tune in to the replay of Part One and Part Two to hear what they talked about!