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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.
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October 19, 2008 12:01 AM ET
Target-date funds, the all- in-one portfolios that are becoming the cornerstone of many workers' 401(k) plans, are now attempting to weather their first real stress test. Not surprisingly, most of these funds have suffered significant losses in recent months as the equity markets have tumbled. Yet, because target-date funds now serve as the default investment vehicles for many workers who are automatically enrolled in 401(k)s, plan sponsors will be monitoring and evaluating the performance of these funds more carefully than ever. “There will certainly be much more scrutiny now of target-date funds and much more emphasis on downside protection,” said Pam Hess, director of retirement research at consulting firm Hewitt Associates. “I wouldn't be surprised if there was a movement to more conservative funds, or to offerings that would help participants preserve their assets during retirement.” Target-date funds invest a 401(k) participant's assets in a mix of equities and fixed-income vehicles, then gradually dial down the exposure to stocks as plan participants near an estimated retirement date. Target-date funds take different approaches, with some skewed more heavily toward equities than others, in order to give participants a chance to build a bigger nest egg during their working years. No matter the approach, it appears every investor in a target-date fund has experienced losses lately. Losses during the third quarter were as severe as 16.85% for those invested in the Oppenheimer Transition 2025 Fund (A shares), which was the lowest-performing target-date fund during the three-month period, according to data compiled for Financial Week by Morningstar. Even the top-performing target-date fund, the DWS Target 2014, posted negative numbers during the third quarter, losing 0.93%, according to Morningstar, which analyzed a universe of 321 target-date funds. On average, the most conservative target-date funds lost 8.1% during the third quarter, while the most aggressive funds declined by 10.9%, according to Ibbotson Associates, an investment advisory arm of Morningstar. And of course, with equity markets having experienced a historic slide earlier this month, declining more than 15% in just a matter of days, participants in target-date funds are now staring at significantly lower 401(k) balances than they were just a few weeks ago. The time period involved is only a short span for what's intended to be a long-term investment, of course. But for some—particularly older workers and retirees—the drop could have a major impact in the very near term, said Ron Surz, a consultant and founder of TD Analytics. He pointed out that the most widely used target-date funds—those provided by mutual fund giants Fidelity, Vanguard and T. Rowe Price—have posted losses this year ranging from 6% to 13% in the funds they provide for people who are presently retired, or plan to retire in 2010. “At that stage in your life, you can't put your retirement assets at risk,” Mr. Surz noted, adding that he believes participants should not have any equity exposure when they are about to retire. “Preservation has to be the name of the game.” He estimates that for older workers, a 15% loss in a 401(k) account could translate into three years of lost retirement income. In light of the recent market declines, Mr. Surz asserted that plan sponsors have a “moral obligation” to re-examine the target-date funds they're offering and determine whether they're too risky for workers as they near retirement. And with roughly 300 target-date funds on the market now—about twice the number available in 2006, according to data from Lipper—plan sponsors have more options to choose from than they did just a few years ago, when many selected the target-date funds they're currently offering to participants. The biggest differentiator among target-date funds is how they invest participants' assets at the actual date of retirement, Ms. Hess said. Some of the most conservative funds leave participants with as little as 20% of their assets in stocks, whereas the most aggressive funds can keep well more than half of a portfolio's assets invested in the equity markets. “More aggressive funds have been popular because their objective is to get an investor through a prolonged period of retirement that could last up to 25 or 30 years,” she said. “But these more conservative funds may now have more appeal, because investors are a lot less vulnerable to volatility.” At the same time, Ms. Hess and Mr. Surz said, plan sponsors need to start thinking about adding options to 401(k) plans that address participants' needs during retirement. Features such as a rollover IRA annuity option or a guaranteed income fund, Mr. Surz said, would allow participants to move the assets they've accumulated in a target-date fund into a vehicle that is insulated from equity market risks during their retirement. “And [that] would also ensure that they don't outlive their savings,” he added. For corporate plan sponsors, it could also be another way to protect themselves from a potential headache. “Whenever there are huge losses, lawsuits usually aren't very far behind,” said Gregory Ash, chairman of the ERISA litigation group at law firm Spencer Fane. And with many companies directing workers' 401(k) contributions into target-date funds when employees are automatically enrolled in the plan, “people won't have to look very far when they want to assign blame for not being able to retire when they thought they would,” Mr. Ash said. FW
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