Stock rally lifts target date funds, but they still lag year-over-year

The stock rally that begin in March boosted target date funds to an average return of 15.5% in the second quarter, ending a dismal string of six negative consecutive quarters, according to a report released today. The second-quarter return was still slightly below the Standard & Poor’s 500 stock index, which gained 15.9% during the period, according to data from Ibbotson Associates Inc., a registered investment adviser and wholly owned subsidiary of Morningstar Inc., both of Chicago. The weighted-average return of the 13 indices that collectively form the Moderate Morningstar Lifetime Allocation Index family was 15.3%. On a year-over-year basis, the average target date fund lost 20.7% while the S&P 500 Index lost 26.2%. Ibbotson tracks 312 target date funds with at least a one-year track record, representing 48 fund families. Target date funds suffered massive losses last year and participants have complained that the funds, which are marketed as becoming more conservative as the anticipated retirement date of the individual nears, took too many risks on equities. On June 18, the Securities and Exchange Commission and the Department of Labor held a joint hearing about the marketing and design target date funds. Co-author Rod Bare, director of asset allocation indexes for Morningstar, who testified at the hearing, predicts the most likely action to come from congressional scrutiny will be: … Increased disclosure requirements outlining the risks associated with the funds. … The amount of current and future equity exposure of the funds … Whether the fund is slated to end when a person enters retirement or is expected to provide income throughout a person’s retirement.