Reuters Money
Target date funds get better and bigger, report finds
Target date funds are getting better – and that’s good news, because they’re also becoming the 800-pound gorilla of the workplace retirement saving scene.
The use of these funds, which invest in a mix of assets with the aim of reducing equity exposure as participants approach retirement, has accelerated sharply in recent years, due in large measure to the growth of auto-enrollment options in workplace plans.
Brightscope/Target Date Analytics reports that the TDFs account for 10 percent of total invested assets in retirement plans, a figure that is expected to hit over 28 percent by 2020. And Vanguard reported recently that 79 percent of the plans it administers offered TDFs last year, up from 13 percent as recently as 2004. Likewise, 42 percent of Vanguard plan participants used TDFs last year, up from just 2 percent in 2004.
But they’ve been criticized for maintaining levels of equity exposure too high for older investors, and for steep fees. Yet a study released Tuesday by Brightscope and Target Date Analytics reveals target date funds are improving their performance in both of those areas.
The study finds that the industry is moving toward a more conservative posture on the critical issue of fund series glidepaths – that is, the year targeted for the lowest exposure to equities. “Funds can take very different approaches to the glidepath,” explained Brooks Herman, Brightscope’s head of research. “Sometimes the landing date can be many years past the target date in the fund name.”
The Brightscope/Target Data Analytics study finds that 40 percent of TDFs are now using a “to versus through” approach to glidepath, up from 30 percent as recently as 2007. That means the most conservative asset allocation is reached in the year of the fund series name. “We like that, because it’s truth in advertising,” Herman said. “As an investor, I know what I’m getting.”
The study’s glidepath findings are consistent with an analysis by Morningstar for Reuters Money back in August, which found that losses during the summer market meltdown were far less severe for 2010 and 2015 TDF series than losses were for those funds in 2008.
Are investors under 40 too risk averse?
Are today’s 20- and 30-year-olds less willing to take investment risk following the latest bear market and recession than their age group was in earlier times?
Some are, and some are not.
As stock prices have gone through wide swings in recent memory — with the Standard & Poor’s 500 Index plunging 57 percent from its all-time high of October 9, 2007 to the low of March 9, 2009 and then bouncing back nearly 100 percent — it’s understandable that young investors would have varied reactions.
Their views of market risk have depended not only on how much money they can afford to invest but also on the ways they invest: as employees in 401(k) defined contribution (DC) plans, individuals invested in IRAs, people investing outside tax-deferred accounts, “non-working” spouses self-employed and so on.
What’s more, opinions also could have depended increasingly on relatively new DC plan factors whose significant features may not yet be widely understood.
The importance of greater understanding was brought out at the recent annual meeting of the Investment Company Institute, when ICI Chairman Edward C. Bernard gave special attention to investors under 40 as he recalled recent ICI investor surveys’ findings that “across a wide spectrum of ages, investors have a reduced appetite for risk.”
“What’s particularly striking,” the T. Rowe Price Group vice-chairman says, “is that … Americans born in the 1970s — today’s 30-somethings … are less willing to take investment risk than their counterparts born in the 1960s … this group is shy about investing in stocks.” In 2010, the share of households headed by 30-somethings that own stocks was lower than in any other cohort born after the Great Depression, he noted.
The best thing you can do, it to become an active trader, and stop trusting your money to others. In particular the “Professionals” who either only make money in an up market or by “churning” an account. The key greater equity investment, in our young is education about trading. Become a student of money and training. http://www.creditspreadsystem.com My son age 20, has been trading credit spreads, since he was 17. To be the victor, not the victim.
Workers stashing money in 401(k) plans at record rates
Thanks to automatic enrollment and an improved stock market, employees are stashing money in employer-sponsored retirement plans at a record-high rate, according to a new Aon Hewitt study.
The consulting firm’s analysis of three million employees across 120 large companies shows that 75.8 percent of eligible employees participated in their company’s defined contribution plan — usually a 401(k) plan — in 2010. That’s the highest level since 2002, when the firm began tracking defined contribution plans, the company reported. In 2009, participation was 73.7 percent.
Other key findings:
* The average employee’s total plan balance was $76,020 at the end of 2010, while the median balance was $24,680. (Fidelity Investments, which is the nation’s largest administrator of retirement plans, recently reported that the average U.S. 401(k) retirement-savings account had a record $74,900 in assets as of March 31.)
* Nearly three in 10 plan participants contributed below the company match threshold, up slightly from 2009.
* Pretax contributions to defined contribution plans were unchanged from 2009 at 7.3 percent of pay, but still down slightly from pre-recession levels in 2007 (7.7 percent).
* Nearly one-third (29.4 percent) of plan participants contributed below the company match threshold, up slightly from 2009 (28.2 percent).
Retirement: The trouble with target date funds
Target date funds (TDFs) have taken off in recent years as more workplace retirement plans install automation options.
TDFs invest in a mix of assets and aim to reduce equity exposure as participants approach retirement. The basic idea is good, considering that many investor portfolios suffer from benign neglect when it comes to rebalancing, fund selection and reducing exposure to riskier investments as retirement approaches.
But many retirement investors don’t really understand how TDFs are allocated between equities and fixed income. Fees can be high, and some critics don’t think TDFs are structured to select the best-in-class funds for all asset groups.
If you’ve defaulted into a TDF, check under the hood for these common problems:
Misunderstandings about risk: TDFs have come under fire for maintaining high equity allocations even in funds tailored for investors near retirement age. Many TDF investors near retirement age suffered dramatic losses in the 2008 market crash. Target funds with dates between 2000 and 2010 lost 22.5 percent in 2008, and funds with target dates between 2011 and 2015 lost 28 percent, according to Morningstar. But those are broad averages; some funds with dates as early as 2010 lost as much as 50 percent of their value in 2008.
The big 2008 losses can be discounted — to an extent — by the once-in-a-lifetime nature (one hopes) of the financial crash; the resulting liquidity crisis forced many fund managers to sell whatever they could to meet redemptions, resulting in especially large losses even in well balanced TDFs. But that doesn’t change the fact that there’s no industry standard for fund naming, or the perception gap among near-retirement investors who think they’ve adopted a more conservative posture.
The industry notes — correctly — that the glide path for most TDFs isn’t the target year of retirement, but some point beyond. “More TDFs are designed to deliver investment strategies for life — not just for your working life,” says a spokesman for the Investment Company Institute (ICI). “Few, if any, serious financial planners would recommend a 100 percent cash (or cash-and-bond) portfolio for a 65-year-old facing the potential of 30-plus years in retirement.
I want to heartily second NewsLady.
If you do your own legwork, you can build a portfolio which matches your personal needs. If you hire a professional, you’ll ultimately pay a huge amount of money for something that nobody understands (and almost certainly doesn’t fit you personally). There is no substitute for a personal understanding of your investments.
Are young investors too cautious?
Young investors are cautious about their retirement investing and looking for all the help they can get via automation. That’s the most striking finding in the annual study by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) of more than 20 million 401(k) participants, released on November 22.
The study finds that recently-hired employees in their 20s held 41.5 percent of their retirement portfolios in target date or balanced funds in 2009. That compares with just 16.7 percent of 401(k) plan participants in all age ranges.
(The flocking to target date funds wasn’t limited to young investors–62 percent of newly-hired plan participants in their 60s are placing 90 percent or more of assets in target date funds. Just how many workers are getting hired in their 60s, we’ll leave for another day’s post.)
The new report follows earlier indicators of a new conservatism among young investors. A separate ICI survey of mutual fund investors showed that just 34 percent of retirement investors under age 35 were willing to take substantial or above average risk in their portfolios in 2009, down from 48 percent in 2005.
Young investors likely are taking the wrong lesson from the 2008 market crash. Indeed, today’s EBRI-ICI report shows that investors who suffered through the market meltdown have rebounded substantially since then. The average 401(k) account balance for participants over age 30 who have been in the study’s database since 2003 was $109,723 at yearend 2009–up 31.9 percent from 2008. Across the nine years studied, investors saw an average annual growth rate of 10.5 percent. The gains reflect employee and employer contributions and investment returns and loan activity, net of fees.
Financial experts usually advise young investors to sock away up to three-quarters of their retirement account contributions in stocks to keep up with inflation and accumulate a bigger nest egg for retirement. These ”new conservatives” will fall short of their retirement goal if they don’t get more aggressive with stocks.
Photo: A student reads on the campus of Columbia University in New York, October 5, 2009. REUTERS/Mike Segar
“Financial experts usually advise young investors to sock away up to three-quarters of their retirement account contributions in stocks to keep up with inflation and accumulate a bigger nest egg for retirement. These ”new conservatives” will fall short of their retirement goal if they don’t get more aggressive with stocks.”
That conclusion assumes stocks perform as well as they have in the past 70 years if the stocks outcome were averaged and we exclude survivor bias but would not solve the problem of portfolio volatility approaching the target redemption date.
