Target-Date Funds Aren’t That Safe
One of the main advantages of target-date funds, or lifecycle funds, is that the asset allocation of these funds is automatically adjusted as the target date approaches, going from aggressive (more stocks, less bonds) in the early stage to conservative (more bonds, less stocks). With target-date funds, investors leave the the job of adjusting and rebalancing the fund’s asset allocation to the fund manager. For investors with long time horizon, target-date funds are great to diversify investments because a target-date fund, essentially a fund of funds, usually consists of a number of individual mutual funds from different categories within the same fund company, giving investors exposure to different asset classes. However, if you are near retirement and have been using target-date funds like those with 2010 funds for your retirement, the asset allocation of the fund may not be appropriate for you. After seeing what happened in the stock market in 2008 and early this year, you are not going to be happy if a target-date fund is the core holding in your retirement account.
As I discussed early when I looked at target-date funds from Vanguard, Fidelity, and T. R. Price, target-date funds’ allocations to bonds and stocks are different, even though they have the same target retirement date. In some cases, the difference is rather significant. Following what I did two years ago, I checked performances of fifteen 2010 target-date funds from some largest mutual fund companies and found that some funds are still heavily investing in stocks, despite only a couple of years away from reaching the target date.
|American Funds Target Date Ret 2010 A (AAATX)||2000-2010||-27.5||-6.0|
|Banc of America Retirement 2010 A (BFBAX)||2000-2010||-27.4||-6.7|
|DWS Target 2010 (KRFAX)||2000-2010||-3.6||-1.6|
|Fidelity Freedom 2010 (FFFCX)||2000-2010||-25.3||-4.7|
|Harbor Target Retirement 2010 Inv (HARFX)||2000-2010||N/A||N/A|
|Hartford Target Retirement 2010 A (HTTAX)||2000-2010||-27.8||-3.9|
|JHancock2 Lifecycle 2010 A (JLAAX)||2000-2010||-29.8||-5.3|
|Oppenheimer Transition 2010 A (OTTAX)||2000-2010||-41.3||-7.5|
|PIMCO RealRetirement 2010 A (PTNAX)||2000-2010||N/A||-1.4|
|Principal LifeTime 2010 A (PENAX)||2000-2010||-30.6||-7.4|
|Putnam Retirement Ready 2010 A (PRXRX)||2000-2010||-26.2||-0.7|
|T. Rowe Price Retirement 2010 (TRRAX)||2000-2010||-26.7||-4.6|
|Vanguard Target Retirement 2010 (VTENX)||2000-2010||-20.7||-5.2|
|Van Kampen 2010 Retirement Strategy A (VRAAX)||2000-2010||N/A||-4.6|
|Wells Fargo Advantage DJ Target 2010 A (STNRX)||2000-2010||-11.2||-4.2|
The worst performer is Oppenheimer Transition 2010 A (OTTAX) fund, which have lost more than 41% last year and another 7.5% this year, according to Morningstar data. The result, however, didn’t really surprise me because the fund, as of November 30, 2008, still have 65.5% invested in stocks, the highest among funds listed above. On the other hand, the fund in the group with the best return last year, DWS Target 2010 (KRFAX), has more than 85% of its assets invested in bonds. That strategy paid off as KRFAX only lost 3.6% in 2008.
|Fund||Stocks (%)||Bonds (%)||Cash (%)|
|American Funds Target Date Ret 2010 A (AAATX)||59.5||30.8||7.7|
|Banc of America Retirement 2010 A (BFBAX)||57.2||35.1||7.6|
|DWS Target 2010 (KRFAX)||13.6||85.4||1.0|
|Fidelity Freedom 2010 (FFFCX_||45.9||39.8||11.8|
|Harbor Target Retirement 2010 Inv (HARFX)||N/A||N/A||N/A|
|Hartford Target Retirement 2010 A (HTTAX)||54.9||37.5||6.1|
|JHancock2 Lifecycle 2010 A (JLAAX)||52.8||40.1||7.6|
|Oppenheimer Transition 2010 A (OTTAX)||65.5||30.8||4.3|
|PIMCO RealRetirement 2010 A (PTNAX)||0||100||0|
|Principal LifeTime 2010 A (PENAX)||48.5||46.4||9.4|
|Putnam Retirement Ready 2010 A (PRXRX)||28.1||65.1||6.2|
|T. Rowe Price Retirement 2010 (TRRAX)||58.1||36.1||4.7|
|Vanguard Target Retirement 2010 (VTENX)||53.4||45.0||1.3|
|Van Kampen 2010 Retirement Strategy A (VRAAX)||N/A||N/A||N/A|
|Wells Fargo Advantage DJ Target 2010 A (STNRX)||26.5||67.1||6.3|
Over the long term, stocks have been proven to delivery superior performance than bonds. However, when the stock market went donw some 40% in a year, it could take much longer time to recover from the deep loss. If you have 20 or 30 years to retirement, then you can just wait for the stock market to bounce back, which eventually will happen. But for people near retirement, time is what they don’t have on their side. Even though allocating a portion of investments to stocks during retirement can maintain growth of the overall portfolio, the ultimate goal is preserving capital, not seeking aggressive growth. With many 2010 target-date funds having 50% or more invested in stocks, they obviously did poorly in helping investors reaching that goal.
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