Target Date Funds. Just Set It And Forget It…

Set it and forget it

Ronald M. Popeil was born to a jewish family in 1935 in New York City. He was six years old (1941) when his parents got a divorce and he was shipped off to Florida to live with his grandparents.

Not only did his parents not want each other, they didn’t want Ron or his brother either (side note: no one ever gets over not being wanted by their parents, but that’s a post for another day).  

His grandparents took them in and he stayed there until the age of 17 and then Ron went on to change the world.

Ron became one of the world’s best pitchman in selling a “set it and forget” way of life.

Ron sold the idea to tens of millions of people. The parts of your life you didn’t care for but needed to deal with, they could just be “set” and “forgotten” about until they were ready.

Ron Popeii

How to have a great retirement without any worry…

One of Ron’s biggest “set it and forget it” products was his Showtime Rotisserie, which went on to sell hundreds of millions of dollars worth. You see Ron had been honing his skill since the early 1950’s selling “a better way of life.”

And Americans loved it.

American loved that parts of their life could just be set and forgotten about until that part was ready. Though Ron sold the Chop-O-Matic, the Veg-O-Matic and hundreds of other kitchen gadgets, what he was really selling were shortcuts and onestep solutions to problems people didn’t want to deal with.

“In 2000, Popeil broke worldwide sales records by selling over $1 million worth of his Showtime Rotisseries during a one-hour live airing on QVC television (selling approximately 150 units each minute to viewers).” RonPopeil.com

Ron Popeil is so accomplished at “pitching” that he is forever intertwined in American culture, just take a look at just a few of the people that have incorporated Ron into their art or business…

… Alice Cooper, the Beastie Boys, “Weird Al” Yankovic, The X-Files, Futurama, King of the Hill, The Simpsons, Sex and The City, The Daily Show, The West Wing… BUT probably the most famous of them all is Dan Aykroyd in this one Saturday Night Live skit.

The art of the Pitch… you’re worried about your future? Easy we have a product that will change your life.

SNL - Bass O Matic

Malcolm Gladwell even won a National Magazine Award for his work titled, The Pitchman of which Ron’s most notable products are discussed.

In 1994 Wells Fargo and Barclays introduced to the world its first Target Date Fund. Wells and Barclays noticed investors were having problems with their 401(k). Investors couldn’t be bothered to learn what to do.

Every Investor Wants A One-Step, Set it and Forget it Solution to investing. And the Big-Box Industry Knows it.

Even if employees would sit through an hour presentation on investing, at the end of the presentation, people would walk up to the presenter and say in a whispered voice,

“I understand all that allocation and risk stuff, but would you just tell me what to do?”

Force feeding information wasn’t working.

The Big-Box world needed a “set it and forget it” solution. The Big-Box world needed the mutual fund version of the Showtime Rotisserie. And they found it in Target Date Funds.

Even today when I typed in “which 401k option to choose” into Google, I get over 30 million suggestions. The problem. Most are completely wrong. Here’s the results.

Figuring Out My Investment Future is Scary. Is there a one-step, set it and forget it solution?

Four observations here:

  1. The Big-Box industry is spending tens of billions of dollars trying to figure out how to invent and sell you the investment equivalent of the Veg-O-Matic. And they are killing it. They were listening and watching what Ron Popeil was able to do for kitchen utensils and they did it for investing.
  2. Target Date Funds are sold just like the Showtime Rotisserie. Just set it and forget it.
  3. Chopping tomatoes and onions and investing for retirements are more similar than not. People want the salad without the work. People want the great retirement without the work.
  4. Isn’t it crazy that the vast majority of people still feel that learning about growing money is experienced like “force feeding?”

Here, Kiplinger chimes in on Target Date Funds and points out three reasons to avoid them.

You will not win. The Big-Box world will spend billions [a year] figuring out how to sell you what you want… and not what you need.

With hundreds of billions at stake, Fidelity (1996), T. Rowe Price (2001)  and Vanguard (2003) all followed Wells Fargo and Barclays (1994) and created their own Target Date Funds.

Did you catch that?

Target Date Funds were born in the late 1990’s and began one grand experiment in the early 2000s. Remember, prior to the 2000 to 2002 Dot Com Crash, people thought investing was easy, just buy and things go up (set it and forget it). In the world of investing, Target Date Funds are brand new.

By 2002 Fidelity, T. Rowe Price and Vanguard began aggressively “encouraging” their 401(k) clients to include Target Date Funds.

Unfortunately investors cannot outsource their responsibility. Yes… they can outsource their blame, but not their responsibility. Damn!

By 2005 the Target Date Fund arms race had begun between the Big-Box leaders. And performance mattered most above all else.

More and more Target Date Fund companies were pushing the limits to increase their performance, which would increase their sales.  

What could possibly go wrong?

A newly invented “set it and forget it” investment product took hold and hundreds of billions of dollars of funds were flowing into these new (read: unproven) financial products.

Fast forward to 2008.

The fastest selling Financial product of its day.

Target Date Analytics, an independent third party research company found that the average 2010 Target Date Fund had, wait for it, 45% of its assets invested in stocks IN 2008!

The people invested in these 2010 Target Date Funds were saying to their Big-Box adviser, I’m going to be retired in two years (2010) so please make sure all that money will be there so I can live a good life, that was the promise.

There were some Big-Box Advisers like AllianceBernstein’s 2010 Target Date Fund (LTDAX) that had 55% invested in stocks. 55%… two years before people needed that money to be there for their retirement. Yikes!

Alliance Bernstein’s Target Date Fund 2010 fell 33% in 2008 alone. For reference the S&P500 fell 37% in 2008.

Losing 1/3rd of your money in one year, 24 months before you were going to retire changes your retirement. And that was just 2008.

Investors are willing to pay for a ‘guarantee.’ And that’s the promise of Target Date Funds

It gets worse.

Alliance Bernstein was charging up to a 4.25% front-end load (sales commission) to its clients to buy this piece of crap. Investors were wanting a “guaranteed” investment and they were willing to pay for it. That’s how badly investors wanted a “set it and forget it” investment.  

It gets even worse.

On top of that 4.25% front-end load, AllianceBernstein was charging anywhere from 0.64% to 1.64% a year in fees to manage this “set it and forget it” fund. You can verify these numbers right here on the SEC’s own website.

The Showtime Rotisserie like the target date funds that followed practically sold themselves.

Just tell us when you are going to retire and we’ll handle everything else. “I guarantee it.”

I guarantee it

Fancy phrases like “Monte Carlo simulation” and “an entire research department” really mean, “we learned the words that will make you feel safe.”

And do you know how Target Date Funds were shown to work? They use Monte Carlo simulations to map out your probable future. And they have entire departments of professional analysts and researchers to allocate your money. And. All. You. Have. To. Do. Is. Set it and forget it.

The promise, Target Date Funds would move the investor from high quality equities to high quality bonds over their lifetime. And then when they want to retire, bam! A pot of gold would be waiting for them.

Heck even the government, yes the same government that didn’t see the real estate crises coming, the same one that didn’t see the Global Financial Crises coming, nor the European Debt Crises. The U.S. Department of Labor designated Target Date Funds as a “qualified default investment alternative!”

According to Cerulli Associates, Target Date Funds are the most popular choice of 401(k) investors today with over a trillion dollars invested in these “set it and forget it” investments.

Monte Carlo Simulation

For what’s it worth, Not one Monte Carlo Simulation caught the Dot Com Crash, The Real Estate Crash and The Global Financial Crises… nor will it catch the next one. So, please the nest time a big-box adviser says, “Monte Carlo…” ask them how it did in 2000 or 2008. 

Here’s a great article by Forbes that goes into the gorey details of the earlier days of Target Date Funds.

The Target Date Fund is just one example of how people are getting hurt. I show four more examples of how investors have been lured into thinking they will be safe.

And I’ve put it all in my newest training titled, Wealth on Demand. Too much? Too hype-y? You be the judge as it was deliberately written with the skeptic in mind.

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

P.S. “It’s a terrible thing, I think, in life to wait until you’re ready. I have this feeling that actually no one is ever ready to do anything. There is almost no such thing as ready. There is only now. And you may as well do it now. Now is as good a time as any.” — Hugh Laurie

If you are not quite ready then now’s the time to click this button.

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