Target date funds posted their third straight quarterly gain in last year's fourth quarter, a 4 percent increase that trailed a 6 percent rise in the S&P 500 index of widely held stocks. For the entire year, target date funds were up 27.1 percent, according to a report from Ibbotson Associates, a unit of Morningstar. The past three quarters follow six straight quarterly losses during the stock market's extended decline. Measured from the market's peak in October 2007, Ibbotson said, the average target date fund lost 7 percent a year, compared with an 11 percent drop in the S&P 500.
[See Best Affordable Places to Retire.]
Target date funds are keyed to investors' planned retirement ages. Over time, they automatically adjust their mix of stocks, bonds, and other holdings to create a risk profile, or glide path, appropriate to an investor's changing age. The funds have become increasingly popular default options in many 401(k) plans. The sharp losses they posted during 2008 drew attention to whether the funds were too aggressively invested in stocks and other risky holdings. But criticism has waned since their recovery last year, and the funds have continued to pull in substantial amounts of new contributions. At the end of 2009, Ibbotson said, investment gains and new contributions into target date funds had caused their assets to rise to $256 billion from $159 billion at the end of 2008.
Morningstar evaluates the target date fund performance of 20 large families of funds. In the most recent quarterly rankings, as of the end of last September, here is how the 20 fund groups were rated:
- Top: American Century, American Funds, T. Rowe Price, Vanguard.
- Above Average: JP Morgan, TIAA-CREF, Vantagepoint, Wells Fargo.
- Average: Fidelity, MFS, Schwab.
- Below Average: AllianceBernstein, DWS, Fidelity Advisor, ING Retirement, John Hancock, MassMutual, Principal, Putnam.
- Bottom: Oppenheimer.
Since the funds came under fire for their 2008 performance, some funds have adopted a more conservative investment strategy. However, most funds have not, and say their mix of holdings is in the best long-term interests of investors. Over a longer period of time, they advise, the funds will best realize their objectives by maintaining holdings in equities that are higher than some critics advocate. During the past three quarters, in fact, the recovery of the stock market has tended to favor funds with equities and other traditionally higher-risk holdings.
[See Best Places to Retire.]
Ibbotson tracked the performance of various asset classes held by the funds in last year's fourth quarter and over the entire year. While U.S. stocks performed well, the largest gains in 2009 were posted by stocks in emerging overseas markets (up 79 percent) and in so-called junk bonds that provide high yields (up 58.2 percent). Low interest rates, on the other hand, generally punished conservative yield investors:
- Asset Class (Fourth Quarter Return; 2009 Return)
- U.S. Large Growth Equity (7.9%; 37.2%)
- U.S. Large Value Equity (4.2%; 19.7%)
- U.S. Small Growth Equity (4.1%; 34.5%)
- U.S. Small Value Equity (3.6%; 20.6%)
- Non-U.S. Developed Equity (2.2%; 31.8%)
- Emerging Market Equity (8.6%; 79.0%)
- Real Estate (9.4%; 28.0%)
- Commodities (Futures) (9.0%; 18.9%)
- High-Yield Bonds (6.2%; 58.2%)
- U.S. Aggregate Bonds (0.2%; 5.9%
- U.S. Short-Term Bonds (0.4%; 3.8%)
- TIPS (Treasury Inflation Protected Securities) (1.8%; 11.4%)
- Cash (0.0%; 0.2%)