The line in the Vanguard press release dated October 6th, 2009 offered the following: “We also caution against using short-term performance figures—however attractive—to guide your investment decisions.” Why would they say such a thing after the run-up, that even they suggested was, too-far-too soon? And could the worry that this short-term outlook would tempt the 3.2 million investors in their 401(k)s under management to jump on the hottest fund in the hope of recouping what was once theirs?
The rebound in 2009 was quite the stunner. If you stand back and look broadly at it, it makes absolutely no sense and at the same time, does. A 10% unemployment rate could be seen as a 90% employment rate, better than most economies around the world, even the good ones. While foreclosures mounted, not everyone was suddenly outdoors. While businesses were trying new ways to make money, such as not selling products but instead hoarding cash and consumers were finding ways to be prudent, the stock market was running away enthusiastically and the fund king of the index was concerned.
Now, not so much. They even sound a little boastful. Seems that 2009 was good enough to announce that two-thirds of their accounts had done so good that at the end of 2009 they had recovered to their late-2007 levels. That is good news and I don’t want to diminish the reasons for that success.
But pointing towards automatic enrollment and target date funds as the reason doesn’t make sense. Target date funds were mostly ignored by the investment buying public prior to the downturn in question. Mediocre returns did not play to the investor the company was warning to be careful. They became the safe-haven of many who lost sizable sums, and any gains these funds made were muted by some of the aggressive funds that these same investors fled.
Auto-enrollment helped the market move steadily north during this period, getting more investors in the market as it approached the top. Once in, they experienced a sudden wealth effect and artifically inflated the overall success of the group.
But so far this year, the story is wholly different.
|
Data as of 6/30/10 |
2nd Quarter |
YTD |
1-Year |
|
Standard & Poor’s 500 (Domestic Stocks) |
-11.9% |
-7.6% |
12.1% |
|
DJ Global ex US (Foreign Stocks) |
-12.6 |
-11.2 |
9.2 |
|
10-year Treasury Note (Yield Only) |
3.8 |
N/A |
3.5 6.0 |
|
DJ-UBS Commodity Index |
-4.8 |
-9.7 |
2.6 |
|
DJ Equity All REIT TR Index |
-4.1 |
5.4 |
53.6 |
Although Fidelity in a separate analysis of this past quarter’s performance, which suggests dismal is still possible and losses can happen regardless of how you invest, they suggests that on a year to date basis, your performance would still be more or less positive.. But what if you had a target date fund? How would you have faired?
First things first. A target date fund is the favorite of the auto-enrollment plan, harnessing at least the new employee and in many cases, the older one as well. It literally targets a date in the future, when you would hypothetically like to retire and adjusts the stock to bond risk accordingly. Except when it doesn’t.
Target date investor looking to retire in 2010 were in for a shock. Their funds had lost 24% in 2008, just two years away from the point when the fund would have been the most conservatively invested. That started people wondering and when they did, they uncovered some harsh truths.
When Morningstar looked into some of the next closest dated funds, the 2015 series, they found allocations that put their investors in harms way when they should have been reallocating towards conservative. That comparison revealed that one fund, the AllianceBern 2015 Retirement fund had an allocation of 71 percent stocks, 28 percent invested in bonds and 1 percent cash while another, the Oppenheimer Transition 2015 had a mix of 65 percent in stocks, 24 percent in bonds and 11 percent cash. Vanguard wasn’t off the hook either. The company’s Vanguard Target Retirement 2015 fund was 60 percent stocks, 37 percent bonds, 3 percent cash.
According to Robert Strayer writing for Pensions & Investments Online: “Seventy-five percent of defined contribution plans for which Vanguard is record keeper offered target-date funds in 2009, and 42% of those plans’ participants invested in them.” Vanguard proudly announces that many of these investors were under professionally managed accounts.
In a bumpy market and potentially getting bumpier, there are unknown risks at play and the numbers seem to point to towards another surprise. Perhaps the markets will do well. But those with target date funds can never be guaranteed that their fund will do as promised or deliver when needed.
They may tell you, as Vanguard did in their latest report that only 14% of their defined contribution plans were all-in stocks. But many will find out, they were more in stocks in many instances than they realized. Perhaps too late.
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Great post. Target funds, which ideally should be a simple easy investment vehicle, are in fact confusing and misunderstood by both many 401(k) participants and many plan sponsors. One key element is to look at a given TDF and determine if they are designed to invest “To” retirement or “Through” retirement. One can argue good or bad about these funds, but in my opinion the biggest issue is a failure on the part of the fund companies (and others) to communicate to plan participants what these funds are and what they are not. I recently saw a graph of 40 or so 2010 TDFs and the equity percentage ranged from about 20% to about 80%. For participants who may not be financially astute this is a terrible situation where many older folks are unknowingly taking on far more investment risk then they think or than is prudent for them.