Posted: 7 Mar 2013 Last revised: 13 Jun 2017
Date Written: March 6, 2013
This article examines briefly the performance and composition of “shorter-dated” target date ("TD") funds, defined by the author as those intended for participants within a dozen years of, or already in, retirement, using data provided by Morningstar. Such funds performed worse in the severe market crunch of 2008 – far worse in some cases – than investors were likely expecting. This is now widely recognized. More importantly – and disturbingly – shorter dated TD funds remain too aggressively invested in most cases, delivering performance (and exhibiting risk), on average, in line with pension funds. Meanwhile, longer-dated TD funds (>2030) behave mostly like all-equity portfolios.
Since pension funds likely have a longer-term investment horizon than most shorter dated TD fund investors, the average shorter-dated TD fund is almost certainly more aggressively invested than the average near-retiree/retiree can tolerate. At the same time, longer-dated funds may be under-diversified. However unlikely the prospect of a substantial stock market decline may seem at present, the potential for large stock market losses remains. The next "bear market" will make retirement unattainable, permanently, for many.
A quick survey of shorter-dated TD funds reveals that there are disappointingly few choices for investors at or in retirement and seeking a relatively conservative TD option. Plan sponsors should consider alternatives, such as "custom" TD funds, when the shorter-dated TD fund component of a TD fund manager's offerings exhibit pension-fund like risk and return.
Keywords: target date funds, target date, defined contribution, life cycle,life cycle funds, asset allocation funds, 401(k)
Suggested Citation: Suggested Citation
By Jodi Dicenzo
By Meb Faber