Target date funds need to disclose not only the asset allocation percentages in their marketing materials, but also the underlying funds in which they invest, Sandhya says.
"These funds are aimed at people too busy to focus on their investments," she says. While investors who actively manage their investments have their choice of mutual funds, those who do not are often put into target date funds, which are approved by the Department of Labor as default options -- billed as "just set it and forget it and everything is taken care of," Sandhya says, and many believe it.
"As a concept, target date funds are a good instrument for retirement plans. The problem lies in the way they are structured and whether they are doing the right thing for their investors," Sandhya says.
She explains that otherwise underperforming funds, which are seeing reduced inflows, can be propped up by feeding them into target date funds. Funds with higher-than-average fees are also chosen to boost profits at the expense of investors, Sandhya says.
She is quick to point out that many target date funds take great care to protect investors. Her research doesn't identify those using a "fund of funds" approach and investing internally, which "opens up all kinds of potential for conflicts of interest."
-- Reported by Joe Mont in Boston.
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