By JANE J. KIM, March 27, 2010
Are target-date funds inching closer to the target?
The much-maligned retirement-savings vehicles are designed to be the financial equivalent of the Ronco Rotisserie Oven: Set it and forget it. Investors who want to retire in 30 years, say, can invest in a 2040 fund for the next three decades. Over time, that portfolio is supposed to become safer as investment managers increase their bond holdings.
But target-date funds performed so atrociously in 2008 that their entire premise was called into question. Portfolios geared to 2010 fell by 25%, on average. And similar funds offered by different firms turned in significantly different results: the Wells Fargo Advantage Dow Jones Target Date 2010 Fund, for example, lost 11% in 2008, while the Oppenheimer Transition 2010 Fund plunged 41%.
Now regulators are stepping up efforts to police these mystery portfolios. The Securities and Exchange Commission is looking into the ways firms market and name target-date funds. And in recent weeks Chairman Mary Schapiro has asked her staff to recommend new rules this spring for disclosing the funds' investing strategies.
Firms, meanwhile, have started to tinker with their offerings. Some providers, such as Charles Schwab, Wells Fargo and John Hancock Financial Services, have cut fees or pared back on riskier stock holdings. Fidelity Investments added inflation-protected Treasury bonds and other instruments to its target-date portfolios, while AllianceBernstein recently introduced a "volatility management" tool that attempts to shelter some of its target-date funds' assets when markets get choppy.
Given the wide variation among target-date funds, investors should know what is in the funds before buying, says Mercer Bullard, an investor advocate and associate law professor at the University of Mississippi. That means doing more legwork, from reviewing the fund prospectus to tracking disclosures to see how much of the fund's assets are in stocks at any one time. "If that makes you squirm, add a bond fund," says Laura Lutton, editorial director for mutual-fund research at Morningstar. "If you think the fund is not bold enough for you, add another S&P 500 or other equity fund."
So which target-date firms are doing the best job of allocating assets and disclosing risks in their funds? In a recent report, Morningstar cited American Funds, American Century Investments, T. Rowe Price and Vanguard Group as the top performers based on their funds' risk-adjusted returns relative to other target-date funds, price, quality of the managers and the funds' asset-allocation strategies, among other things.
Ms. Lutton says American Funds scored well because of the firm's strong management team. American Century's Livestrong series has put up strong performance numbers, she says, and T. Rowe Price's target-date funds have "shown evidence of strong securities selection." Vanguard's rock-bottom average expenses of 0.19% have given its target-date funds a leg up, she says.
The biggest loser, according to Morningstar: OppenheimerFunds' LifeCycle series. One of its bond funds, it turns out, made bad bets in highly risky mortgage-backed securities, which torpedoed the target-date funds' performance in 2008. Other concerns with the funds include high fees and manager turnover.
"While we are disappointed with the rating, we understand that certain funds did not meet our performance expectations," spokeswoman Jennifer Stevens wrote in an email, adding that the firm has taken steps to address the funds' allocations.
The take-away for aspiring retirees: "Investors should know what they're buying," says Robert Reynolds, Putnam's chief executive and president. "Not every 2010 fund is the same."
Write to Jane J. Kim at [email protected]