Peter Mallouk Sparks Heated Debate on Target Date Funds‘ Age Focus

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To which Mallouk stated, “Better than many alternatives yes. Investing in expensive mutual funds is better than not investing at all, but that doesn’t preclude us from recommending something better.”

Advisor Rick Ferri chimed in that TDFs “may not be perfect, but they sure as heck beat paying an advisor a stupidly high 1% AUM fee to unsuccessfully attempt to beat the market.”

Others pointed out that there are some TDFs with relatively low management fees.

User @timothyjquillin tweeted to Mallouk, “If you really believe this, you haven’t spent enough time in the real world speaking to 401k participants. But if your goal is to make controversial statements to drive engagement, mission accomplished.”

Mallouk responded: “I really believe this, I’ve personally sat across the table from over 1,000 401k participants, and I actively recommend risk based funds over age based funds. Nothing controversial about it. Investing based on age creates inappropriate allocations for many.”

@timothyjquillin responded: “I’ve also sat across the table from countless 401k participants and helped clean up inappropriate target risk allocations. Don’t say target date funds are a “terrible choice” for most people. You are influential and that is the wrong message. Focus on increasing savings rates.”

On Thursday, Mallouk posted a thread summarizing his reasoning: People have different income needs and a variety of outside income, including from Social Security benefits, pensions, retail properties or other investments. Also, life expectancy differs. He noted that a TDF assumes everything is equal, when it’s not.

His goal is to educate people as oppose to putting them into TDFs. For example, he states, “Some don’t realize costs matter. The goal is to help them understand why lower cost funds tend to perform better.” And some don’t understand risks.

“The goal is for them to learn how they can make their portfolio better suit their needs, not to throw our hands up and say ‘they will never get it.’”

He added that “To optimize, an investor should put the odds in their favor by investing as much as they can in their 401(k)s as early as possible, choose very low cost over very high cost where possible, and choose a few indexes or a risk based fund over a TDF.”

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