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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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May 5, 2008 12:01 AM ET
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Morningstar has been quietly developing an extensive family of target-date indexes, one that aims to make life easier for corporate plan sponsors, who are increasingly relying on these all-inclusive funds to handle a chunk of workers' retirement savings. Morningstar's indexes are expected to give plan sponsors a better sense of how a certain target-date fund's investment performance measures up against a specific set of benchmarks—a critical but currently challenging part of the process for many plan sponsors when evaluating these funds for their 401(k) plans. In many ways, choosing a target-date fund can be a lot like settling on a religion, says Morningstar analyst Rod Bare. “You won't know if you picked the right one until you're dead,” he quipped, recalling a joke he's heard over the last several years at industry events. But judging the performance of target-date funds has been no laughing matter for many investors, Mr. Bare noted, as these funds consist of several different underlying mutual funds that are invested across multiple asset classes and employ different long-term asset allocation strategies. Target-date funds—which essentially age with investors along a specific “glide path” toward an estimated retirement date—often vary in their investment approaches, as some funds are more aggressive than others and favor a greater weighting toward equities, for instance. When the equity markets don't perform well, as in the first quarter, conservative target-date funds will look like they performed better than the aggressive ones, strictly because of their lesser market exposure, Mr. Bare noted. “But that performance doesn't take their risk profile into account.” To this end, Morningstar will break down its target-date indexes into three different categories based on their risk-taking approaches: aggressive, moderate and conservative. Within each of these three categories, Morningstar will offer 10 separate indexes that are based on the different retirement dates these funds most frequently target. Morningstar's indexes will benchmark performance for funds beginning with a target date of 2010 and, in five-year intervals, will go all the way to 2055 for the funds with the longest tails, Mr. Bare explained. There will be three other sets of indexes for the years 2005, 2000 and 1995, to measure the performance of target-date funds that have already matured and are essentially supporting retired investors as income funds, he added. Such a range of indexes—39 in total—would allow a plan sponsor to measure the performance, say, of an aggressive fund with a target retirement date of 2030 against an index that considers this specific investment horizon, as well as the level of risking-taking involved. The Morningstar indexes will likely be rebalanced each quarter, Mr. Bare said, to help account for the allocation adjustments that fund managers make to their target-date products from one year to the next. These indexes and their projected performance levels are calculated with proprietary models supported by Ibbotson Associates, Morningstar's asset-allocation specialist and institutional consulting subsidiary. “It's really applying a lot of the principles of defined-benefit plan management to the world of defined-contribution plans,” Mr. Bare said, adding that Morningstar's indexes should be rolled out in the coming months. Given Morningstar's clout in the mutual fund space, its indexes will surely expand a burgeoning base of benchmarks that are becoming available to plan sponsors, 401(k) experts note. Other players, namely Dow Jones and Target Date Analytics, continue to develop a number of indexes designed to benchmark target-date performance. “The more tools plan sponsors have to measure performance for target-date funds, the better,” said Pam Hess, director of retirement research at Hewitt Associates. While no one single set of indexes will necessarily emerge as an industry standard, Ms. Hess pointed out that plan sponsors have increasingly been seeking out more independent resources to measure the performance of their existing target-date offerings. Each, she added, could play a role in providing plan sponsors with a more complete view of performance across a broader target-date universe. And considering that nearly 80% of large companies are now offering target-date funds in their 401(k) plans—nearly double 2005 usage rates, according to Greenwich Associates—there should be no shortage of demand for evaluating these funds. Adding to the demand is the fact that most of the 280 target-date funds now on the market are relatively new, Mr. Bare said. “We think now is a good time to make an entry,” he said. “We wanted to weigh in and have an opinion on the space, and also put some structure around the best practices.” FW
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