A rebound last year after a bludgeoning in 2008 has money managers breathing a bit easier about their near-term target-date funds.
Some of 2008's laggards among near-term funds, commonly known as 2010 target-date funds, turned in the best results last year.
For example, AllianceBernstein's 2010 Retirement Strategy Class I fund for institutional investors returned 29.6%, and T. Rowe Price Group's Retirement 2010 fund, 28%. Both are well above the average 2010 fund gain of 22.4%, according to Morningstar Inc., Chicago.
The research firm's calculation for performance represents a simple average of all classes of 2010 funds, including institutional and retail.
Because of their poor performance in 2008, these defined contribution plan investment vehicles have been sharply criticized by legislators and others for their high equity allocations.
In fact, Sen. Herbert Kohl, D-Wis., chairman of the Senate Special Committee on Aging, is expected to introduce legislation this spring that would expand the fiduciary responsibility for target-date funds to service providers, and not just plan sponsors.
“Millions of Americans are defaulted into target-date funds, and will rely on this investment as their primary source of retirement income down the road,” Mr. Kohl said in an e-mail to Pensions & Investments. “Our bill will make sure these investors are getting the strong fiduciary protections they deserve.”
In theory, target-date funds were designed to have less equity exposure and more fixed-income exposure the closer they got to the target retirement date. In practice, however, 2010 target-date funds had an average equity exposure of 46.5% in 2008, a year in which the stock market tanked and 2010 funds lost an average 25.1%, according to Morningstar.
“Most companies whose funds have aggressive equity allocations realized they had to sit tight (in 2009) to recover,” said Joshua Charlson, a senior fund analyst at Morningstar.
Although equity-heavy 2010 funds were hit hard in 2008, they didn't automatically get a big bounce-back last year. If their fixed-income components performed poorly, their total returns were suppressed, he said.
The 2010 funds that did best in softening the blows of 2008 and capitalizing on the rebound in 2009 were those with, among other skills, strong stock-picking and a “higher-quality” fixed-income focus in 2008, Mr. Charlson said.