Target-date troubles persist
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Varagon Capital fills new business development role
      Fitch Group in deal to acquire CreditSights
      Credit managers’ outlook still gloomy but brightening – survey
      Digital Colony picks head of Europe capital formation
    • Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
      Nick Horsfall
      Redington names managing directors for investment consulting team
      Marsh & McLennan Agency sets sights on Compass Financial
    • New York State Common challenges Tyson’s dual-share stock structure
      Credit managers’ outlook still gloomy but brightening – survey
      Investors call for action on COVID-19-induced humanitarian crisis at sea
      U.S. jobs worker restaurant
      Job market slipped in December as virus surge hindered activity
    • Ascensus, Empower acquire Truist record-keeping business
      PCS Retirement acquires Alliance Benefit Group-Rocky Mountain
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • New law requires MassPRIM to increase diversity of managers, consultants
      Impact investors getting savvier, more efficient – report
      SSGA alum named head of ESG at Mirova
      Aegon moves to cut carbon from workplace DC business
    • Galina Churkina
      Building research earns honor from Aquila Capital
      Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      MacArthur Foundation invests in women’s safe housing fund
      Bill Harmon
      Voya offers fee break for minority-owned firms
    • The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
      Michael Hintz
      CQS deal with spinoff team falls apart
    • New York State Common challenges Tyson’s dual-share stock structure
      A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      Maine Public Employees boosts target to alternative credit
    • A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      A sign at a China Telecom Corp. store in Shanghai on Jan. 6, 2021
      Managers make further divestments from sanctioned Chinese firms
      The Chinese flag flies in front of the Liaison Office of the Central People's Government in Hong Kong on May 22, 2020
      Standard Life Aberdeen JV to open mainland China pension insurance company
    • Maine Public Employees boosts target to alternative credit
      Los Angeles City Deferred Comp narrows list to 2 in manager search
      Connecticut pension fund CIO resigns
      Arizona State Retirement looking for CIO
    • Sharmila Chatterjee Kassam
      AIF Institute hires former Texas ERS deputy CIO as executive director
      Varagon Capital fills new business development role
      SSGA alum named head of ESG at Mirova
      Capital Group hires BlackRock executive to launch ETF unit
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
      CPPIB in deal with Greystar to develop U.S. housing
      Global real estate investments to hit $79 billion in 2021 – survey
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
      Hedge funds warming up to financial sector, remain long U.S. equities
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      Cartoons depict a year like no other
      view gallery
      25 photos
      2020 in editorial Cartoons
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • Climate change and emerging markets after Covid-19
      An Asset Owner's Guide to Multi-Manager Portfolio Management
      Research for Institutional Money Management
      The Future of the U.S. Dollar - Dominant currency or one of many?
    • Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
      Robert Raben
      Commentary: What the asset management industry must do to bolster diversity
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By iShares
      For institutional investors, ETFs can make meeting liquidity needs easier
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
      By the Numbers
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Print
January 11, 2010 12:00 AM

Target-date troubles persist

Awareness of participants' attitudes important after 2008 woes

Robert Steyer
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Target-date funds, battered by a rough market in 2008, continue to face the problems of attracting consistent contributions from participants, controlling the amount of pre-retirement distributions and discouraging investors from bailing out after they retire.

    “Participants on average are clearly not saving enough for their retirement needs, and our current research shows this may be getting worse for a sizable number of investors,” said a new research report from J.P. Morgan Asset Management, New York.

    “The 'wow' moment for me” was the new survey's tracking participants over time, Anne Lester, a managing director and co-author of the research, said in an interview. The research followed people over 65 who stopped working in 2006 and remained invested in their plans. From 100% invested in December 2005, the percentage dropped to 62% the next year, to 33% in December 2007 and to 19% by December 2008.

    Even though target-date funds, including what Morningstar Inc. calls the “much-maligned” 2010-fund group, made a comeback in 2009 because of a rising stock market, the money manager's findings are powerful reminders that developers of target-date funds must be more sensitive to participants' attitudes about investing and saving in an uncertain economy.

    Otherwise, participants will be disappointed with these funds, many of which, the report said, “have too much volatility embedded in their portfolio design.”

    However, the good news is that the bad news wasn't as bad as JPMAM executives had feared. Several indicators are “marginally worse,” Ms. Lester said. “On the flip side, it didn't get that much worse.”

    The latest study analyzes 2007 and 2008, building on JPMAM's research published in 2007 that covered 2001 through 2006.

    The first survey was more surprising to Ms. Lester because it showed a big gap between what the report called “simplified industry assumptions” and marketplace reality. The company's J.P. Morgan Retirement Plan Services unit, record keeper to more than 350 defined contribution plans with 1.7 million participants, provided the raw data about target-date funds and other funds for this research.

    In the first survey, conventional wisdom about annual salary raises, contribution rates, participant borrowing, premature distributions and post-retirement withdrawals often differed dramatically from what researchers found.

    For example, the industry assumption that participants would withdraw a consistent 4% to 5% annually wasn't in the same ballpark as the finding that the average participant withdraws more than 20% per year at or soon after retirement.

    The industry assumption that participants don't borrow from their funds clashed with the first survey's finding that 20% of participants borrow on average 15% of their account balance. The most recent research found that in 2008, 17% of participants borrowed on average 25% of their account balance. Ms. Lester said she is concerned that borrowers will stop contributing to their retirement plans while they pay off the loans.

    “The most disturbing finding to me was the lower savings rate,” Ms. Lester said. The initial industry assumption was that participant contributions start at 6%, increase steadily and reach 10% of salary by age 35.

    The earlier research found contributions started at 6%, reached 8% by age 40 and reached 10% by age 55. The most recent research found, however, that the average contribution rate started at 5.7%, rose to 8% of salary by age 45, and reached the 10% level at age 57.

    “These differences may seem insignificant, but they may have sizable compounding effects,” the JPMAM report said. “This potentially disturbing trend could force younger investors to play a difficult game of 'retirement catch-up' in their 40s and 50s.”

    Every other year

    Among other issues where reality didn't match assumptions about consumer behavior, the latest research found the average participant received a salary increase every other year — rather than the conventional wisdom of annual raises or the first survey's report of raises every two out of three years.

    Given that participants act differently from how experts had expected, J.P. Morgan Asset Management executives advocate that target-date funds broaden their asset classes to include such areas as emerging markets equity, emerging market debt, real estate, real estate investment trusts and high-yield fixed income to reduce expected volatility “without sacrificing long-term potential.”

    Such a portfolio is preferable to target-date funds that have too big a chunk of equity, especially in the five to 10 years before retirement, according to the report. “Portfolios that tempered risk purely with more conservative holdings were less volatile, but they also drastically curtailed long-term return potential,” the report said. Lower volatility “may help minimize the long-term impact of negative participant behaviors,” such as loans, reduced contributions and withdrawals.

    Greater portfolio diversity gets enthusiastic support from Casey, Quirk & Associates LLC, a Darien, Conn.-based consultant to investment management firms. In conjunction with the Chicago-based Profit Sharing/401k Council of America, the firm published a survey in November saying that even though the average target-date fund lost 32% of its value in 2008, nearly 90% of plan-sponsor survey respondents were satisfied with their target-date offerings “to some degree.” Nearly two-thirds said they would consider changes to their target-date funds.

    “They're not going to throw their target-date funds over the side,” David J. Bauer, a Casey Quirk partner and survey co-author, said in an interview.

    The turmoil surrounding target-date funds in 2008 creates a greater opportunity for designing plans that are less volatile than what Mr. Bauer calls the “first-generation” funds, especially the 2010 funds whose flaws included participants' assumptions that these funds were low-risk investments and wide variations in the funds' equity exposures.

    “There are questions but also key opportunities from a product-development perspective,” said Mr. Bauer, who said target-date funds should be broadened to include asset categories such as Treasury inflation-protected securities, commodities and real estate. “Asset managers have to find the right mixes for plan sponsors, and sponsors have to be comfortable.”

    The Casey Quirk survey predicted target-date funds would grow to $2.6 trillion in assets by 2018 compared with $311 billion in 2008. “Target funds are in the spotlight, and when you're in the spotlight, you've got to start dancing,” Mr. Bauer said. “Performance didn't match expectations for many of the first-generation funds. We can do better for the investor the next time.”

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Targeting millennials: Author, niece put his latest book to music
    Targeting millennials: Author, niece put his latest book to music
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Climate change and emerging markets after Covid-19
    An Asset Owner's Guide to Multi-Manager Portfolio Management
    Research for Institutional Money Management
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    The Future of the U.S. Dollar - Dominant currency or one of many?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center