Wednesday, November 15, 2006

Over-engineering Target Retirement Funds

Single asset class investment funds are the investment equivalent of blunt objects. They provide basic though limited value when utilized on a standalone basis. Their potential value is unlocked when combined with other asset class investments. The leading target retirement funds do a reasonable job of combining asset classes in an efficient way and also provide a simple method for matching investments to investors. These products fit many investors generally though few specifically. Competent individual investment advice provides the greatest potential for optimizing asset mixes in a way that best suits the unique appetites and circumstances of each investor.

Though building customized target retirement funds may make sense in certain cases, the cost, effort and added fiduciary liability incurred in over-engineering these products might be better spent in the delivery of consistent and comprehensive personalized investment advice to retirement plan participants. In providing participant tools for retirement, it may be more effective for plan sponsors with a good pile of “rocks” to provide “nail guns” instead of “hammers”.


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