Julie Jason: The power of targetdate funds.
If you have been thinking about how to make investing easier on yourself or your employees, check out target-date funds, a subject we’ve been discussing for the past two weeks. As promised, this column is about data that will help you understand how funds perform.
In a search using the SteeleSystems.com database, I found more than 600 target-date offerings (representing a single share class), ranging from target dates of 2000 through 2060-plus.
The first thing I wanted to explore is how these funds performed during a financial crisis. I screened for funds that were in existence during the last downmarket cycle from October 2007 through February 2009. Of the 174 funds, about 60 percent declined over 40 percent, and a third of those fell as much or more than the S&P 500 (which fell 50 percent). Experiencing that kind of volatility can’t be comforting in retirement.
Of the remaining funds, 19 lost less than 30 percent during the down-market cycle. Only 6 lost less than 20 percent.
In the up market that followed, the fund that lost the least made the least (up 47 percent); some of the biggest losers during the downturn recovered handily (up more than 200 percent).
If you take in the full cycle from October 2007 through May, the least volatile funds had the lowest returns (33 percent to 46 percent, with two exceptions that returned 64 percent and 71 percent). The highest performer returned 100 percent for the full market cycle after declining 45 percent during the down market. For context, the S&P 500 returned about 121 percent for the full cycle, declining 50 percent during the down market.
Then I wanted to see if target-date fund returns varied over shorter periods during the current bull market. I expected to see longer-horizon funds return more, and indeed that was the case.
Looking for a more recent period (the past 10 years), I had a list of 210 funds. The best performer (a 2050 target-date fund) returned 107 percent for the period (7.6 percent annualized). The worst performer (a 2010 target-date fund) returned 31 percent (2.7 percent annualized).
For a shorter period (five years), I found 362 funds. The best-performing fund (a 2055 target-date fund) achieved a 66.4 percent return (10.7 percent annualized). The worst performer (a 2010 target-date fund) returned only 10 percent (1.9 percent annualized).
The lower returns reflected lower equity allocations in funds with shorter horizons. For example, a fund that is 40 years away from the target date may have 100 percent invested in stocks. The same fund may have 50 percent at the target date and 20 percent 10 years after that.
That’s just a look at performance, which gives me an idea of past outcomes. A lot more is involved, of course. A good resource is Morningstar’s 61-page research report, “2018 TargetDate Fund Landscape: Sizing Up the TrillionDollar, Increasingly Passive Giant.” It is available at morningstar.com/content/ dam/marketing/shared/ pdfs/Research/TDF_ Landscape_2018.pdf?cid= EMQ_
“Target-date funds’ distinguishing feature is their shifting asset allocation as an investor approaches retirement,” according to Jeff Holt and Heather Larsen, the authors of the report. “Looking at a target-date series strategic equity glide path, which indicates the anticipated equity stake at different points before and after the target retirement date, is the simplest way to follow the shifts.”
For further context, an American Funds report, “Five Considerations for Evaluating Target Date Funds,” summarizes things nicely. Consider: 1. the needs of employees who will participate in the 401(k) plan, 2. the glide path construction, 3. cost versus value, 4. the quality of the funds that are used in the target-date fund, and 5. consistency, repeatability and down-market protection.
Are target-date funds the answer for all investors or all 401(k) plans? Hardly. But they are worth a look if you want to automate investing over a longer horizon.
Do you invest in targetdate funds? What research do you do before choosing investments? I want to hear from you. Please take this quick five-question survey, and let me know what’s on your mind. Here’s the link: surveymonkey.com/r/ YY6PJM3.
If you enjoy classroom discussions, join me for a class I’m teaching at Norwalk Community College on Tuesday at 6:30 p.m. The subject: “Maintaining Your Lifestyle in Retirement.” To register, go to norwalk.edu/extendedstudies/#registration and search “FIN D5037.”