Jane White's Press Releases

The Only Thing Worse Than Not Telling 401(k) Participants How Much to Save is Offering Reckless Target Date Funds

Despite the fact that most Boomers can’t afford to retire because they haven’t saved enough, many mutual fund companies are duping them into thinking that target-date mutual funds loaded with stocks will make up for lost time and savings. This practice totally contradicts the time-honored rule that your “glidepath” in these funds should feature a shrinking stock allocation as your investment time horizon shrinks.

As a result, in 2008 the average return of the four largest target funds aimed at people expecting to retire in 2010--holding 87% of all assets--was minus 25.8%, almost as bad as the overall market slump for the S&P 500 that year of minus 38%.

The poor performance shouldn’t be surprising, given that the shorter your investment time horizon the bigger the risk of loss. Of the 70 10-year holding periods since 1926, there have been nine periods when investors in the S&P 500 lost money; returns for the five-year periods just since 1998 have been negative in five out of the seven periods.

Amazingly, not only is T Rowe Price Group’s 2010 target date fund nearly 60% in stocks, its investment strategy is to keep retirees in stocks until death, with a 20% stock allocation at age 85. “The time horizon is not retirement, it’s life expectancy,” insists Jerome Clark of T. Rowe.

My pension actuary buddy couldn’t disagree more. For someone 70 years old or older “more than 5% to 10% (invested) in equities represents too much risk for someone who is likely to only live another 10 to 12 years,” he says.

What’s more, if you’re a Boomer with a short time horizon, it makes absolutely no sense to depend on the investment returns of a product when you risk not only a market slump but a loss in principal--better to bank a big chunk of your paycheck in a CD or money market fund.

What’s ironic is that T Rowe is one of the few mutual fund companies that appears to know the actuarial formula for retirement adequacy: that you need a MINIMUM of 10 times “final pay”, or your salary near retirement, in your 401(k) account when you’re ready to retire. A financial planner at T Rowe told the Chicago Tribune that folks ought to monitor their progress as they get closer and should have six times their income in their accounts when they are 10 years from retirement. Unfortunately, Boomers at best have the equivalent of only twice their incomes in 401(k) and rollover accounts at age 65.

Unfortunately, while T Rowe knows the formula, they do not appear to be communicating it to their participant clients since there is no mention of it on their website, perhaps out of concern that participants would be angry when hearing the bad news.

However, let’s face it, if I’m overweight and the best remedy is exercise, it would be irresponsible for a bariatric surgeon to do surgery. Likewise, the mutual fund industry faces the moral hazard of profiting from increased assets under management rather than communicating the “inconvenient truth” that a continuing paycheck or higher contributions or employer matches are the only “glidepath” enabling Boomers to achieve a secure retirement.

Interviews:

9/30/2009:

10/08/2009:

10/09/2009:

Book Reviews:

09/30/2009: Book Review: Welcome to the Poorhouse by Miranda Marquit

10/06/2009: "Jane White: Your 401k Isn't Enough" by Miranda Marquit

10/08/2009: "Recession is Best Time to Revive Your Retirement Plan" by Kimberly Amadeo, About.com

America, Welcome to the Poorhouse Book Review by Kimberly Amadeo, About.com

10/08/2009: "10 Steps to Avoid the Retirement Poorhouse" by Gary Stern, Minyanville.com

10/22/2009: "Tip: To retire at 65, you need 10 times your salary." by Peter King, NewsDay.com

10/23/2009: "Bookshelf: Retirement Plans Under the Microscope.", NYTimes.com

12/09/2009: "Join the revolt by sending out some e-mails.", by Barbara Whelehan at Bankrate.com

12/10/2009: "America, Welcome to the Poorhouse." by Heather at TheGreenestDollar.com

12/10/2009: "Book Review & Giveaway: "America, Welcome To The Poorhouse" by FinancialSamurai.com

12/11/2009: "REVIEW: America, Welcome to the Poorhouse (Jane White)"by Wojciech Kulicki at Fiscalfizzle.com

12/16/2009: "Review of Jane White's America, Welcome to the Poorhouse" by Michael Dink, www.dinksfinance.com

12/17/2009: "Interview with Author Jane White" by Michael Dink, www.dinksfinance.com

12/19/2009: "America, Welcome to the Poorhouse", www.northerncheapskate.com