Target-date fund families are known for having a conservative or aggressive glidepath, but a new analysis shows some families have made drastic changes to their glidepaths over time.
A new paper from Ibbotson Associates Inc. looked at 21 major target-date fund families, including Fidelity Investments, The Vanguard Group Inc. and T. Rowe Price Group Inc. Glidepaths, which show how a target-date fund's asset allocation changes over time, generally become more conservative as employees age.
Ibbotson found that some fund families undergo year-over-year changes in glidepath construction, rather than adhering to a particular investment philosophy. As a result, the equity allocation for a 65-year-old participant in a 2010 fund might be different from the equity exposure for one in a 2005 fund.
Examining Fidelity, Ibbotson discovered a variety of changes to the glidepath between 1996 and 2010. For instance, an employee who was 65 at the end of 2001 would have been invested 30% in equities. In comparison, a participant who was 65 at the end of last year would have had an equity allocation near 50%, according to Ibbotson.
“Because of this dispersion, it's very difficult to predict how much equity today's 35-year-old will hold at retirement, and therefore hard to determine if the glidepath is appropriate for those investors,” the report noted.
Fidelity did not immediately provide comments on the results.
Meanwhile, Vanguard had a distinct change in 2006, becoming a little more aggressive, according to Ibbotson. A chart shows that a 65-year-old at the end of 2005 would have had an equity allocation of about 30%. Equity exposure was just about similar for 2003 and 2004. In contrast, ever since the 2006 change, the equity allocation has hovered near 50% for 65-year-olds.
Indeed, Vanguard's 2006 changes gave investors greater equity exposure over a longer period of time and added emerging-markets equities, company spokeswoman Rebecca Katz noted. “The new allocation was still considered moderate or ‘middle of the road' on the risk spectrum among the marketplace's many target retirement funds,” she wrote in an e-mail.
Finally, T. Rowe Price overall has been stable, maintaining more than 50% allocation into equities for 65-year-old participants since 2006, according to Ibbotson's analysis.
“In 2008 and 2009, there was increased interest in adjusting our glidepath more conservatively,” said Jerome Clark, portfolio manager of T. Rowe Price's retirement funds. “We avoid making glidepath changes based upon short-term market environments, which is consistent with the message we communicate to our investors to stay the course when markets swing to extremes.”
The study is the first of others to come, said author Tom Idzorek, global chief investment officer of Morningstar Inc.'s investment management division. (Ibbotson is a unit of Morningstar.)
“Over time, our fund analysts will be sending out our history of these glidepaths for all the providers and getting an explanation behind what caused this glidepath instability,” he said. “Was this by design, were they trying to time the market, or were they unaware of these relatively dramatic shifts?”
Mr. Idzorek noted that fund manager turnover could be a possible cause behind the glidepath changes, as could additions of other asset classes such as commodities.
“One concern is that it can reflect a lack of true fundamental methodology behind a given glidepath,” he said. “Therefore, it's perhaps more swayed by the individual opinions of current portfolio managers.”
Darla Mercado is a reporter with InvestmentNews, a sister publication of Pensions & Investments.