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Target date funds came under heavy fire for failing to protect older retirement investors after the 2008 market crash. But target date funds (TDFs) have performed better during the market's recent volatility -- thanks to lessons learned last time around.
TDFs invest in a mix of assets with the aim of reducing equity exposure as participants approach retirement. The basic idea is to sound, since many investors don't rebalance or pay attention to reducing risk as retirement approaches. But leading into the 2008 crash, many TDF investors thought the funds were more risk-averse than they really were; many still had substantial exposure to stocks even for investors close to retirement. TDFs also have been criticized for high fees, and some critics don't think they're structured to select the best-in-class funds for all asset groups.
But an analysis by
The results point clearly to improvement in managing equity exposure for investors close to retirement:
-- The 2010 fund series had a loss ratio of 43 percent this year, compared with 60 percent in 2008.
-- The 2015 fund series had a loss ratio of 55 percent, compared with 74 percent in 2008.
Josh Charlson, a senior mutual fund analyst at
"In 2008, many of these funds suffered losses close to what the overall stock market experienced," he says. "In the last couple years, there's been movement toward risk control, particularly in shorter-dated funds. A number of the fund series have reduced their equity allocations in shorter dated funds, and there's also more risk control through hedging strategies."
Many TDF investors near retirement age suffered dramatic losses in the 2008 market crash. TDFs 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
Use of TDFs has accelerated sharply in recent years. Vanguard reports 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.
The rising use of auto-enrollment options in workplace plans helps explain the growth of TDFs. Vanguard says 54 percent of participants in plans that offer auto-enrollment used TDFs, compared with 44 percent of participants in plans using voluntary enrollment.
The growth comes despite criticisms in some quarters that TDF expenses are too high due to the "fund of funds" construction of most of these funds. Many TDFs charge fees for the underlying funds plus an overlay TDF management fee. The industry disputes this criticism; the
But a report from Brightscope, which measures and analyzes 401(k) fund performance, argues that asset weighting masks the true costs of most TDFs. Brightscope research indicates that the only two target date fund series with expense ratios below 0.66 percent are those of Vanguard, with a rock-bottom 0.19 percent and USAA (0.64). "The rest of the funds have fees over 0.66 percent," Brightscope reports, "and over 50 percent of series have fees that are one percent or higher."
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Investing - Target Date Funds Have Performed Better in Latest Market Downturn