May 11

Are There Better Options Than the Lockheed Martin Target Date Funds?

by Geoff Wells

The default investment option for the Lockheed Martin Salaried Savings Plan (SSP) and the Capital Accumulation Plan (CAP) is the managed Target Date funds.  A Target Date fund is designed to capture the entire investment market in a single fund.  In addition, as you approach retirement, the Target Date fund becomes less and less risky.  While this sounds good in theory, there are some significant downsides to using Target Date funds, especially the ones available in the LM retirement plan.

Benefits

For new investors, there are some significant advantages to holding the LM Target Date Funds, the primary of which is simplification.  For an employee in their 20s and 30s, savings rate is by far the most important factor in retirement success.   Focusing on savings rate and simplifying the investment selection with a Target Date fund is a good approach during these years.  Another benefit is that the Target Date funds automatically rebalance on at least an annual basis.   Finally, the Target Date funds decrease in risk over time which could benefit an investor that is disengaged from their accounts.

Risks

It is important to consider how much risk you are truly taking with a Target Date fund.  There is no standard for how much stock market risk a particular Target Date fund holds, so two different funds that have the same retirement year (Target Date 2040) could have drastically different holdings inside of them.    By investing in individual asset classes instead of a single fund, you have the ability to better control the risk taken in the portfolio.  In addition, the risk can be controlled better for other facets of your individual retirement picture.   The ideal risk level may be different if you have a LM pension as well as the SSP.

Costs

The Target Date funds in the LM 401(k) plan are actively managed by Lockheed Martin Investment Management Company (LMIMCo).  On any given day, the LMIMCo can change the internal account managers in the fund which can change the price.

For example, the annual expense ratio on LM Target Date funds can vary between 0.15% and 0.82% at any given time.  That is quite a broad range.  It would be good to know to a more accurate detail if the annual expenses were either $150/year or $820/year (on a $100,000 account).

In contrast, selecting individual index based funds in the plan would have a lower expense ratio of around 0.04%.   Knowing that you are only paying $40/year instead of $820/year (on a $100,000 account) is a big incentive to re-evaluate your investment selection within your account.

Active vs. Evidence-Based Investment Management

At Rockbridge, we fundamentally believe in the evidence-based or index-based investing approach.  The goal of most investors should be to capture the returns of the entire market for the lowest possible cost.   Unfortunately, the Lockheed Martin Target Date funds fall under a category of active management.   The concept of active management means that a fund is making specific investment decisions in an attempt to outperform their benchmark investment.  While the word “active” sounds like a positive characteristic for an investment manager, academic evidence shows that over the long run, a large majority of active managers have lower returns after fees compared to using an evidence-based approach.  Many of the Lockheed Target Date funds also show this performance lag on their Morningstar reports.

Holdings

Although the Lockheed Martin Target Date funds hold many different asset classes, there are several that Rockbridge does not believe adds long-term value for clients.  These asset classes include commodities, alternative investments, futures, and Treasury Inflation Protected Securities (TIPS).  In addition, each target date fund held approximately 9% in cash at the end of 2015.  With the goal of long-term investing, holding cash in a retirement account could decrease your expected return, and thus, your retirement account balance.

Solution

As you can see, the Target Date funds within the Lockheed Martin 401(k) have both benefits and pitfalls.   The main benefit is simple broad diversification, however this comes with increased costs and risk factors for the investor.

At Rockbridge, we prefer to control the risk in your portfolio and reduce the unneeded costs associated with investing.  As mentioned above, the Lockheed Martin plan does have well diversified, evidenced-based funds that are available.  Please reach out to us for an allocation unique to you.

About the Author

Geoff Wells is a Certified Financial Planner at Rockbridge Investment Management. “My interest in financial planning grew from assisting friends and coworkers with their retirement plans. Over time, I developed a knack for simplifying overly complex financial topics. After several years into my aerospace career, I knew that helping people with their personal finances was my professional calling. I feel extremely fortunate to have joined Rockbridge with its fee-only advisory model and remarkable team approach to financial planning.” Geoff is a graduate of the CERTIFIED FINANCIAL PLANNER™ Certification, Ohio State University Finance (M.S.) and MBA, Kelley School of Business, Indiana University, with a Mechanical Engineering (B.S.), University at Buffalo.
Learn more and/or Contact Geoff


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