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Target-date fund strategies rise in popularity – DCIIA survey
By Brian Croce · March 20, 2019 2:12 pm Getty Images
Target-date fund strategies in employer-sponsored defined contribution plan accounts reached $2.1 trillion in assets at the end of 2017, up from $1.3 trillion in 2015, according to research from the Defined Contribution Institutional Investment Association released Wednesday.
I thought the linked article from @JohnN good - but pretty rudimentary.
On a different (I hope related) note, a slick 30-minute TV infomercial - from one of those free dinner annuity peddlers provides occassional comedic relief Sunday mornings (especially if you missed SNL Saturday night). Always interesting observing their various scare tactics designed to dissuade folks from investing in mutual funds. Lots of big impressive looking charts. They seem to prey on poorly informed seniors and those nearing retirement.
The guy today was focused on frightening people away from mutual funds (and Target Date Retirement funds in particular) by highlighting the performance of American Funds Target Date 2010 REATX during 2008 (hardly a representative year). He claims it lost 28% in 2008 despite having only 38% in equities and over 60% in bonds (75% of them rated A or higher).
Can’t confirm his numbers. I’m surprised if REATX actually lost that much. However, in 2008 those invested in it would likely have been working (and importantly still contributing) and at least 2 years from retirement. For comparison, Price’s TRRIX runs a similar 40 / 60 allocation and lost around 20% in ‘08. What these hucksters did not mention was that 2009 was a strong up year. Likely REATX recouped most (not all) of that 2008 loss.
Obviously if you want to frighten folks away from target date retirement funds, highlighting the worst stock market / financial year out of the past 30 or 40 is the way to do it.
The money in target date plans is definitely rising. That doesn't necessary mean they're more popular, at least in the way that word is used - as something many people like.
Rather, DC plans are allowed to be opt-out (employees are enrolled unless they make an active decision to disenroll). Since the plans are allowed to default that money to target date plans (unless employees actively decide otherwise) cash just floods in to target date funds.
If workers sit on their hands and let their paychecks go wherever, it doesn't mean that the target date funds are popular.
REATX lost 27.29% in calendar year 2008 according to its prospectus. TRRIX lost 26.71% in calendar yeaer 2008 according to its prospectus. We all tend to remember the past as better (or at least less bad) than it actually was.
While I agree that selling a product or service based solely on people's fears is sleazy, matching a product/service to a person's fear of loss seems fair. How many people buy Treasury MMFs because they're scared of prime funds? Even more so now that the government has said that prime funds are not as safe. How often do people here quote max drawdown figures, even though those are just one day, worst case statistics?
Products and services may not maximize dollar results but can meet other needs, including providing a sense of well being.
Finally, to address the speculation that REATX made up most of its 2008 loss in 2009 ... According to M*, REATX gained 23.70% in 2009 (41st percentile). That gives it a two year return of (1 - 27.29%) x (1 + 23.70%) - 1 = -10.1%.
Good point on the ‘09 performance of REATX too. Dangerous of me to guess at those numbers. Personally I made up nearly all of my ‘08 losses in ‘09 - but it involved gambling and going heavy into the badly depressed internationals at an opportune time. That’s a luxury most target date funds don’t have.
Yep - These annuity peddlers don’t flat-out lie. They just pick the most extreme case and try to frighten people with the prospect.
My error. Since REATX was a 2010 target fund, I compared its 2008 performance with that of T. Rowe Price's 2010 target fund (TRRAX)'s performance in 2008.
I was mistaken: TRRIX (not TRRAX) did even better than you remembered: -18.39% in 2008. Up 22.07% in 2009, for a combined 2 year total return of -0.38%. So just standing pat would have broken even with this fund.
TRRAX (target date 2010) gained 27.95% in 2009, for a combined 2 year total return of -6.23%.
Domestic or foreign didn't seem to matter. Similar swoons in 2008, similar rebounds in 2009:
The domestic S&P 500 index fund VFINX went from -37.02% in 2008 to gain 26.49% in 2009 (per M*). The international EAFE index fund VDMIX (Vanguard Developed Markets) went from -41.62% in 2008 to gain 28.17% in 2009.
The annuity salesman picked the worst year, but not the worst case (max drawdown). That was something like -38% for REATX (based on Yahoo data - I'm not rechecking this now). Target date funds are sold as sleep at night funds, so IMHO it's fair to look at bad years and ask whether they delivered on their promise. Lots of columns were written after the GFC faulting target date funds for their failure.
Principal protected notes, market linked CDs, index-linked annuities do deliver, in the sense that they protect against market risk. (They still expose the investor to issuer risk, except for FDIC-insured CDs.)
I'm not fond of these products because I feel one is paying to insure against a relatively low probability event happening (long term, multi-year nominal market decline). But I also don't think that FDIC-insured accounts are worth using either, except in very low interest environments or for emergency cash. I'm not their target audience.
My biggest complaint against these products is that they are usually sold in the most expensive format - as annuities - even though the annuity may add nothing but cost. Especially if the investment is already in a tax-favored account such as an IRA.
“My error. I was mistaken: TRRIX (not TRRAX) did even better than you remembered: -18.39% in 2008. Up 22.07% in 2009, for a combined 2 year total return of -0.38%. So just standing pat would have broken even with this fund. TRRAX (target date 2010) gained 27.95% in 2009, for a combined 2 year total return of -6.23%.
“
@msf - I did not know you were capable of error. Thanks for continuing to check this out and for getting back with the correct numbers.
Once ‘08 returns dropped from the current prospectuses (after 10 years) I lost track. That was something I always looked at for every fund I owned (or considered owning) until it got harder to do. An easy error to make. TRRIX is different from their other retirement funds in that it bears no date, nor does it follow a glide slope. As such, it’s not a target date fund.
Anything near 20% is still a steep loss for TRRIX.
Comments
On a different (I hope related) note, a slick 30-minute TV infomercial - from one of those free dinner annuity peddlers provides occassional comedic relief Sunday mornings (especially if you missed SNL Saturday night). Always interesting observing their various scare tactics designed to dissuade folks from investing in mutual funds. Lots of big impressive looking charts. They seem to prey on poorly informed seniors and those nearing retirement.
The guy today was focused on frightening people away from mutual funds (and Target Date Retirement funds in particular) by highlighting the performance of American Funds Target Date 2010 REATX during 2008 (hardly a representative year). He claims it lost 28% in 2008 despite having only 38% in equities and over 60% in bonds (75% of them rated A or higher).
Can’t confirm his numbers. I’m surprised if REATX actually lost that much. However, in 2008 those invested in it would likely have been working (and importantly still contributing) and at least 2 years from retirement. For comparison, Price’s TRRIX runs a similar 40 / 60 allocation and lost around 20% in ‘08. What these hucksters did not mention was that 2009 was a strong up year. Likely REATX recouped most (not all) of that 2008 loss.
Obviously if you want to frighten folks away from target date retirement funds, highlighting the worst stock market / financial year out of the past 30 or 40 is the way to do it.
The money in target date plans is definitely rising. That doesn't necessary mean they're more popular, at least in the way that word is used - as something many people like.
Rather, DC plans are allowed to be opt-out (employees are enrolled unless they make an active decision to disenroll). Since the plans are allowed to default that money to target date plans (unless employees actively decide otherwise) cash just floods in to target date funds.
If workers sit on their hands and let their paychecks go wherever, it doesn't mean that the target date funds are popular.
REATX lost 27.29% in calendar year 2008 according to its prospectus. TRRIX lost 26.71% in calendar yeaer 2008 according to its prospectus. We all tend to remember the past as better (or at least less bad) than it actually was.
While I agree that selling a product or service based solely on people's fears is sleazy, matching a product/service to a person's fear of loss seems fair. How many people buy Treasury MMFs because they're scared of prime funds? Even more so now that the government has said that prime funds are not as safe. How often do people here quote max drawdown figures, even though those are just one day, worst case statistics?
Products and services may not maximize dollar results but can meet other needs, including providing a sense of well being.
Finally, to address the speculation that REATX made up most of its 2008 loss in 2009 ... According to M*, REATX gained 23.70% in 2009 (41st percentile). That gives it a two year return of (1 - 27.29%) x (1 + 23.70%) - 1 = -10.1%.
Good point on the ‘09 performance of REATX too. Dangerous of me to guess at those numbers. Personally I made up nearly all of my ‘08 losses in ‘09 - but it involved gambling and going heavy into the badly depressed internationals at an opportune time. That’s a luxury most target date funds don’t have.
Yep - These annuity peddlers don’t flat-out lie. They just pick the most extreme case and try to frighten people with the prospect.
I was mistaken: TRRIX (not TRRAX) did even better than you remembered: -18.39% in 2008. Up 22.07% in 2009, for a combined 2 year total return of -0.38%. So just standing pat would have broken even with this fund.
TRRAX (target date 2010) gained 27.95% in 2009, for a combined 2 year total return of -6.23%.
Domestic or foreign didn't seem to matter. Similar swoons in 2008, similar rebounds in 2009:
The domestic S&P 500 index fund VFINX went from -37.02% in 2008 to gain 26.49% in 2009 (per M*).
The international EAFE index fund VDMIX (Vanguard Developed Markets) went from -41.62% in 2008 to gain 28.17% in 2009.
The annuity salesman picked the worst year, but not the worst case (max drawdown). That was something like -38% for REATX (based on Yahoo data - I'm not rechecking this now). Target date funds are sold as sleep at night funds, so IMHO it's fair to look at bad years and ask whether they delivered on their promise. Lots of columns were written after the GFC faulting target date funds for their failure.
Principal protected notes, market linked CDs, index-linked annuities do deliver, in the sense that they protect against market risk. (They still expose the investor to issuer risk, except for FDIC-insured CDs.)
I'm not fond of these products because I feel one is paying to insure against a relatively low probability event happening (long term, multi-year nominal market decline). But I also don't think that FDIC-insured accounts are worth using either, except in very low interest environments or for emergency cash. I'm not their target audience.
My biggest complaint against these products is that they are usually sold in the most expensive format - as annuities - even though the annuity may add nothing but cost. Especially if the investment is already in a tax-favored account such as an IRA.
@msf - I did not know you were capable of error.
Once ‘08 returns dropped from the current prospectuses (after 10 years) I lost track. That was something I always looked at for every fund I owned (or considered owning) until it got harder to do. An easy error to make. TRRIX is different from their other retirement funds in that it bears no date, nor does it follow a glide slope. As such, it’s not a target date fund.
Anything near 20% is still a steep loss for TRRIX.
Thanks.