An article titled “A Better Option Than Target-Date Funds” written by Prateek Mehrotra, CIO of ETF Model Solutions and Endowment Wealth Management was recently published in the Industry Voices column on PlanSponsor.com.
In the article, Prateek discusses the following drawbacks of TDFs:
- TDFs assume a “one-size fits all” and fail to take into account unique risk profiles and investment objectives of participants
- TDFs mechanical shift to conservative assets in later years sacrifices growth opportunities
- There is no industry standard for the optimal portfolio allocation
- TDFs with higher allocations to long-term bonds are more sensitive to interest rate risk
He also suggests that because equity prices are extended, investors in retirement plans might want to consider reducing their interest rate risk and equity risk by diversifying into alternative asset classes with lower correlation to stocks and bonds, such as commodities, real estate, hedge funds and private equity- asset classes to which TDFs do not typically allocate.
The entire article can be read here.
