Graphic: A bad year for target-date funds
Target-date funds in 2018 had their worst calendar year since 2008 as equity markets fell and bonds were flat. The initial cause for alarm was that more retirement assets than ever are invested in these funds and most plans automatically default participants into them. However, target-date funds continue to expose participants to varying levels of risk based on their time from retirement.
Negative returns: The average institutional target-date mutual fund lost 6.1% across all target years, with the higher equity allocations of the longer-dated funds pulling them down further. Passively managed funds slightly outperformed active target-date funds.
Risk levels: The target-date fund philosophy is built on principles of diversification and tiered risk levels for different horizons. Funds with greater losses had more risk, but also much more time to make up.
Youth movement: Younger employees are more likely to use target-date funds in their 401(k) plans, a result of the growing adoption of auto-enrollment features into target-date default funds.
The kids are all right: Those closer to retirement have higher odds of making up their 2018 losses in the short term. Those further from retirement are less likely to make it back in the short term; however, higher equity risk has proven historically to outperform lower risk.
*Average institutional class mutual fund. **Based on rolling one-year returns of the S&P target-date indexes. Sources: Bloomberg LP, eVestment Inc., Investment Company Institute
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