Target-date funds were heralded as the mutual fund industry's solution to retirement investors unable or unwilling to make prudent decisions. In theory, the funds are pegged to a future retirement date and then designed to make age-appropriate investments that automatically adjust investment risks to reflect people's window of vulnerability as they approach and enter retirement.
The goal here is to protect people from a big downturn that hits them at exactly the wrong time—when they have little time to allow their investments to recover and are forced to produce current income by selling holdings at depressed levels.
It would seem that target-date funds were tailor-made for 2008. Morningstar tracks these funds in different groups and ran a performance assessment of target-date funds, in operation since at least the beginning of 2008, for the 2000-2014 group. These funds are aimed at investors who are recently retired or nearing retirement, and so the 64 funds in this group should be managed to be the most resistant to this year's market declines.
Well, you probably already know where this story is headed. Investments have been pummeled by the triple forces of a credit crisis, a decline in confidence, and a sharply weakening global economy. Finding safe havens has been extremely difficult.
The U.S. stock market is off about 40 percent in the past year, according to the broad Wilshire 5000 index; global stocks including the United States are down 44 percent this year, according to the Dow Jones World Index. The total return on long-term corporate bonds is down nearly 20 percent, according to the Lehman Brothers index (Lehman may have been allowed to fail but its bond indices are still widely used). Even holding government debt would have cost you a bit in the past year. Putting cash in money-market funds should have yielded small positive returns but there have been risks even here.
So, with this as a drum roll, here is Morningstar's look at the performance of the 15 largest target-date funds in its 2000-2014 group:
|Fund Name||Year-to-DateTotal Return (%)||Fund Size ($millions)|
|Fidelity Freedom 2010||-25.31||10,574|
|T. Rowe Price Retirement 2010||-27.02||3,744|
|Fidelity Freedom Income||-12.16||2,284|
|Vanguard Target Retirement 2010||-22.64||2,252|
|Vanguard Target Retirement Income||-13.63||1,818|
|Vanguard Target Retirement 2005||-18.22||1,541|
|Fidelity Freedom 2000||-13.87||1,537|
|Principal LifeTime 2010 Inst||-29.86||1,381|
|T. Rowe Price Retirement Income||-19.05||1,183|
|Fidelity Freedom 2005||-24.42||836|
|T. Rowe Price Retirement 2005||-22.90||693|
|Fidelity Advisor Freedom 2010 A||-26.24||651|
|Principal LifeTime Strategic Inc Inst||-21.51||468|
|Wells Fargo Advantage DJ Tgt 2010 A||-15.54||411|
|American Funds Trgt Date Rtrmt 2010 A||-28.33||400|
"We've looked favorably on the recent trend for target-date funds to hold bigger equity stakes through their target dates, based on the premise that investors are living longer than ever and thus in more danger of outliving their savings due to the ravages of inflation," Morningstar analyst Greg Carlson wrote last month in evaluating this group. "But the funds on the leading edge of that curve are probably too aggressive for most investors." Carlson said his favorite funds were those of T. Rowe Price and Vanguard.
The only fund family that performed materially better than the big funds was DWS Investments, a unit of Deutsche Bank. It had five small target-date funds in the group that were 75 to 80 percent invested in bonds, The five funds topped Morningstar's list with losses ranging from 3.7 to 8.4 percent, but the biggest of the five has less than $60 million in investments.
The big fund families, which dominate the 15 largest funds here, have been preaching the merits of target-date funds and continue to do so. Investors should look at these offerings and compare the sharp differences in returns among funds with similar objectives. Comparisons should be made for multiple investment periods, and this can easily be done at Morningstar or other investment sites. Look at fee structures here as well, and also check out the funds' trading and turnover patterns. Target-date funds should not have high fees.