Target retirement funds posted their sixth consecutive quarterly loss in the first three months of 2009, according to Morningstar. While their average loss of 7.4 percent was less than the 11-percent drop in the S&P 500 index, that provides little solace to retirement-plan investors who expected little risk when the use of retirement date funds was expanded sharply a couple of years ago. The funds are structured to meet the needs of people throughout their lives, automatically adjusting to more conservative holdings as people near retirement. A 2010 target date fund, for example, is designed to meet the needs of someone turning 65 next year.
As market values plummeted throughout 2008, big losses at many retirement date funds led to intense criticism of the funds and the mutual-fund companies operating them. Many of the funds continued to hold large shares of their assets in stocks even as their target investors reached retirement age. Congressional hearings have led to legislative proposals to change the way the funds operate or even to introduce a new category of retirement fund with government oversight and not under the control of the fund industry.
The Morningstar report noted that the equity holdings of the 304 funds it tracks actually became more aggressive over time, with the average fund in this year's first quarter having a 4-percent higher exposure to equities than was the case five years ago. Morningstar said some fund managers became more aggressive because investors wanted the higher returns that equities have historically offered, and were not focusing on the higher risks of equity-intensive portfolios. Morningstar stressed that "investors, advisors and plan sponsors need to consider their unique risk preferences and risk capacity" when making retirement fund decisions.
Here are the average first-quarter results of funds by their target-date years: