Poor year-to-date performance for 2010 target-date funds from major providers such as T. Rowe Price Inc., Fidelity Investments and Vanguard Group Inc. could force those DC plan participants to postpone retirement or lower their standard of living, said Ron Surz, principal of Target Date Analytics LLC, San Clemente, Calif.
With retirement just over a year away, investors in 2010 funds are sure to be disappointed when they look at their coming third-quarter statements. Year to date through Oct. 9, the T. Rowe Price Retirement 2010 Fund returned -26.16%; Fidelity's Freedom 2010 Fund, -23.92%; and Vanguard's Target 2010 fund, -22.68%.
The benchmark Dow Jones Real Return Index 2010 returned -11.02% and the Dow Jones Target 2010 Index, -14.36%, as of Oct 9. (The Real Return Index includes Treasury inflation-protected securities; the Target 2010 index does not.)
Mr. Surz said purveyors of 2010 target-date funds are too aggressively invested in equities given the funds' proximity to expected distribution dates. Rather, Mr. Surz said target-date funds, which can have between a 30% and 70% equity weighting at the distribution date, should lower their equity allocations.
We have taken the position target-date funds should stick to their knitting, that is focus exclusively on the accumulation phase in generating returns vs. distribution, Mr. Surz said.
At the target date, investors want to be out of risky assets. The target date, say 2010, connotes a specific amount of risk to people and if (managers) want people to stay in the fund in the distribution phase, perhaps they relabel them as 2050 funds a type of cradle-to-death design.
Michael Shamrell, spokesman for Fidelity Investments, Boston, in an e-mail said Fidelity's target-date funds have been designed with a specific time horizon in mind and their asset allocation is managed accordingly. Any enhancements have been or will be long term and strategic in nature and not a tactical response to market volatility.
Obviously we are going to try to help investors by making sure they don't abandon their long-term, strategic investment plans in a moment of panic, Linda Wolohan, spokeswoman for Vanguard, Malvern, Pa., wrote in an e-mail. While no one can guarantee that markets will recover, our view remains that for investors approaching and entering retirement, a balanced investment portfolio that includes exposure to the equity markets provides the best chance for long-term success.
Contact John D'Antona at [email protected]