Target-Date Funds: Wall Street’s “Set It and Forget It” Trap

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Target-date funds are sold as the easy, worry-free choice for 401(k) investors—but that simplicity is disappearing fast. As Jason Zweig warns in the Wall Street Journal, Wall Street has a habit of taking elegant ideas and burying them under fees, complexity, and opaque strategies. In this episode, Chris explains why target-date funds have always been problematic, how over-diversification and mediocre performance leave investors just treading water, and why “alternatives” are likely the next thing quietly stuffed into these portfolios. If you think you’re safely set it and forgetting it, you may actually be volunteering to be the last buyer in Wall Street’s game of musical chairs.

Episode Transcript

Speaker 1 (00:00):
The Watchdog on Wall Street podcast explaining the news coming
out of the complex worlds of finance, economics, and politics
and the impact it we'll have on everyday Americans. Author,
investment banker, consumer advocate, analyst, and trader Chris Markowski.

Speaker 2 (00:16):
Target date funds. All, I know they're popular in four
one k's, but they're problematic in more ways than one.
Jason's Wide Wall Street Journal actually wrote a piece about this,
and I think Jason used to be a fan of
these things. I've never really like them that much, And
I'll get into that in a bit. He said, leave

(00:37):
at the Wall Street to take cheap, simple, elegant idea
and junk it up with fees, complexity and opacity elegant. Nah,
that's what's starting to happen to target date funds, the
investment favored by tens of millions of people saving in
four to one k's on the retirement plans. They said,
a vehicle that couldn't be easier to own may sue

(01:00):
become too hard to understand. These these funds are getting
cluttered with extra holdings. Uh and again, Uh, you know
what's gonna start piling in these things? What don't we
tell you you're gonna start doing They're gonna start Oh,
we gotta put alternative investments in there. Don't doubt me,

(01:20):
they're gonna do it. They're gonna do it because nobody's
paying attention to these things, and they will justify in
their mind. We've got all of these people out there
that just close their eyes pick the target date fund
when they signed up for the four to one K,
and we'll just start saying, oh, look, you know, in

(01:40):
today's day and age, alternatives are great. We're gonna start
putting these in target date funds. And what you're gonna
do is you're gonna end up buying out all the
rich people. You are gonna be the greater fool, the
sucker uh and the demonic game of musical chairs. Don't
doubt me, it's coming. It's coming. The idea behind these

(02:02):
things is it basically supposedly keeps people from doing stupid
things with their money. More than two thirds of all
participants in four one K's hold at least one of
these things. He writes. When we invest, many of us
need to be saved from ourselves. We might chase whatever's
hot and dump whatever's not. Put too much into our

(02:22):
own company stock or diversify my haphazardly buying a little
of this and a little of that. Uh huh, saving
for a goal that's decades away. My trade on this
week's hopes fears, headlines and hunches. Yeah, there's not wrong there.
People do that all the time. This is why you
just you might want to hire a competent advisor that

(02:44):
won't allow you to do that, that will tell you no, okay, Yeah,
that's why you hire somebody that knows what in God's
creation they're doing. And again, we'll save you from yourself.
The saying said it and forget it was made for
these portfolios. Again. The idea was again as a Wall

(03:04):
Street concoction. Here you go, you sign up, you're sitting there,
you sit there at your desk, you're having your little
meeting with HR and our company provides a four oh
one K and they give you a little questionnaire. Very
you know, how old are you, when do you plan
on retire? And blah blah blah blah. You know, just
these questions and then you fill it out and it says, congratulations,

(03:26):
you should own this.

Speaker 1 (03:29):
Now.

Speaker 2 (03:30):
You might be in your twenties, might have be in
your forties and you know when when you want to
retire at that point in time. And I never really
seem to understand.

Speaker 1 (03:42):
But this is me.

Speaker 2 (03:45):
Okay, you know you guys listen to this all the time.
I'm you know, big on taking advantage of life's opportunities
and not letting a fund in your four one k
be the north star for your life. I'm just not that. Yeah,
I'm the same way when I talk to people about

(04:05):
going on vacation, get lost, figure things out. You have
to hire one hundred tour guides. It makes life, it's
more fun. You want to live life a little bit.
And the performance in these things meh. At best, they

(04:27):
tend to over diversify. They've got their little things saying well,
we've got to own this to you know, they're sixty
forty portfolio and how well has that done? It's done meh.
You've basically kept up with inflation. They are better things
you can do. There's cheaper options more often than not.
In for one case, and this is why you get

(04:49):
a little help with this. To me, they've always been problematic.
Now they're going to become more so. Watch Talk on
Wall Street dot Com