Guaranteed Target Date Retirement Funds

This post originally appeared on The DIV-Net. My company pension fund has the option of investing in something called a Target Date Retirement Funds. Here is how investopedia defines these types of funds:

A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.

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These funds are obviously catering to the “one size fits all” crowd – that group of investors who want as little as possible to do with their investment planning and will leave those decisions to their pension company. In my particular, the target-date funds I have access to have taken the target-date concept one step further and provided a guarantee on the value of the fund. Here is how it is described in the fund documentation:

The potential for capital appreciation is combined with protection from downside market risk through a guaranteed value at maturity. If held to maturity, the investor will receive the highest month-end unit value achieved over the life of the fund, as guaranteed by ABN AMRO Bank N.V.

So, I pick the fund with the date closest to my expected retirement date, and I will be guaranteed the highest month-end unit value. If the highest month-end value of that fund hits $15 in January 2025 but when I retire the fund has dropped to $10, then I am guaranteed to receive the $15. Sounds like not a bad deal.

What is the catch? Typically, the fees on these types of accounts kill any benefit the guarantee provides. You forgo future returns of the stock market by paying out a high percentage of your portfolio in fees. However, in my pension plan these fees are not too bad but are still substantially more than than some other choices. For example, the U.S. Index Fund option has a MER of 0.06 (which is super low). The 2035 target-date fund has an MER or 0.14%. Again, not much but the difference between 0.06 and 0.14 is actually huge. I did a quick calculation over at SmartMoney on the different on a $10,000 investment and the difference is $586. That does not sound like much but on a portfolio of $500,000 that equates to fees of just under $30,000. That is a substantial amount of money, especially when you factor in inflation.

I am an active passive investor in my personal portfolio, so there is certainly some draw to using a fund such as this in my pension. I consider this money to make up a big portion of my future retirement funds and want to ensure I maximize the risk / return balance. In markets like this it makes sense (the current funds are under the guaranteed value) but how would it work in an up market? That is something I will need to further investigate. As such, I am going to continue researching these funds However, I would love to hear what others think about these funds. Use the comments and let me know!

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