Target date funds get better and bigger, report finds

October 18, 2011

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.

The report also finds that fees have fallen in the past year, but remain “too high.” While institutional funds had average expense ratios of 75 basis points, moves by Vanguard to introduce TDFs that charge an industry-low 18 basis points prompted Fidelity Investments and TIAA-CREF to respond by introducing funds with expense ratios of 19 basis points. “That is a real reaction to what Vanguard is doing,” Herman said.

The Brightscope and Target Date Analytics study grades target date series on five criteria, including performance, fees, risk, organizational structure and strategy. Researchers analyzed 48 fund series, but graded only 38; those were the fund series old enough to have three years of operating performance data.

The top-rated fund family is American Century Investments’ Livestrong Portfolios. Four other fund series received an “A” grade: Wells Fargo Advantage, MFS Lifetime, J.P. Morgan SmartRetirement and Vanguard Target Retirement. Another seven funds received “B” grades.

Details of the Brightscope/Target Date Analytics report — “Popping the Hood” — won’t be released generally, as it is being marketed to plan sponsors, asset managers and advisers. The researchers also are happy to sell it to anyone else willing to pay its $1,200 price tag.

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