At a time when more U.S. workers are being enrolled automatically into their company’s 401(k) plan, questions are being raised about the most appropriate investments to manage retirement savings. Recent analysis suggests target-date funds remain a solid choice for ensuring a healthy retirement—even during periods of extreme market volatility.
Research by investment firm Charles Schwab examined the performance of the firm's suite of target-date funds from 2007 through 2009, which includes the height of the market downturn. The study reveals that many target-date funds outperformed the overall market and recovered nearly all 2008 losses during 2009. Among their findings:
• Target-date funds performed relatively well through the market conditions of January 2008 through December 2009. The 2010 retirement-date funds (targeting those nearest to retirement) outperformed the S&P 500 stock index by 13.6 percent.
• Dollar-cost averaging investors who maintained their regular schedule of contributions in 2010 retirement-date funds would have recovered nearly all principal (97 percent) as of December 2009, and would have nearly 15 percent more total value than if they invested in the S&P 500 vs. those investors that stopped regularly contributing to their plans at the first dips in the market in January of 2008.
• Those that remained invested from January 2008 through December 2009 did better than those that sold their funds.
'Glide Path' Disagreements
According to research by fund-rating firm Morningstar, similarly strong recovery rates were found with target-date funds provided by other mutual-fund families. However, views diverge concerning the optimal "glide path," the rate for shifting from riskier stocks to less-volatile (but lower growth) bonds as the target retirement year nears. Morningstar advises that "early evidence shows that the most conservative 2010 funds protect capital well on the downside but lag as markets rise, while the funds with more-aggressive glide paths endure greater losses but can make it back quickly."
But others find evidence supporting a more conservative strategy. Research firm Target Date Analytics, in Recovery in Target-Date Funds?, concludes that funds following a more conservative glide path perform better over the long-term than funds that are designed to maintain a high percentage of stocks through participants' retirement years.
"The evidence clearly supports our contention that target-date fund managers should stick to their core mandate, prudently managing participant assets during the accumulation phase, and give up the unsupportable claim that they must manage to participant death," the report states. "That claim is becoming increasingly transparent as a thinly disguised justification for trying to hold on to participant assets."
Stephen Miller is an online editor/manager for SHRM.
Participants Mostly Satisfied with Target-Date Funds, SHRM Online Benefits Discipline, October 2009
Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009
Target-Date Funds Receive Greater Scrutiny, SHRM Online Benefits Discipline, June 2009
Target-Date Funds: Four Key Considerations for Plan Sponsors, SHRM Online Benefits Discipline, April 2008
Target-Date Funds Update (Regulatory Initiatives), J.P. Morgan, March 2010
Recovery in Target-Date Funds?, Target Date Analytics, February 2010
Much-Maligned Fund Group Bounces Back, Morningstar, December 2009
SHRM Online Benefits Discipline