Target-date funds saw negative returns across the board during the first quarter, but those with aggressive stock allocations at their target dates hit those nearing retirement hardest, according to a report Tuesday from Morningstar.
On average, 2020-dated target-date funds posted losses of just over 10% during the first three months of the year. The loss was slightly higher, at 10.6%, for funds with so-called “through retirement” glide paths, which continue to swap out equities for fixed income after their target dates. Those funds generally have a higher equity allocation at the target date than “to retirement” funds, which hold their asset allocations steady after reaching their target date.
By comparison, to-retirement funds of the 2020 vintage had average losses of 8.4%, according to Morningstar’s 2020 Target-Date Strategy Landscape report.
“For investors with a $1 million nest egg who plan to retire in 2020, that’s a difference of more than $20,000 in losses,” the report read.
Debate on to- versus through-retirement glide path design has gone on for years, though the “through” variety is used in more products. The largest target-date mutual fund managers – Vanguard, Fidelity and T. Rowe Price – all use the through design in their series.
The to-retirement design has been touted as safer for retirees, while the through-retirement concept responds to increased longevity by being more stock-heavy at the beginning of retirement in order to boost returns and make assets last for longer.
The target year is the point at which to- and through-retirement series show the biggest difference in stock allocations, with 2020 vintage TDFs showing an average difference of 13 percentage points, according to Morningstar’s report. By comparison, through-retirement 2015-dated funds have a 10 percentage point higher allocation to stocks than to-retirement products, and 2025 funds show an average difference of just five percentage points, the report shows.
“Bear markets shine an uncomfortable light on what an investor’s risk tolerance really is,” the Morningstar paper noted. “Equity-heavy target-date series have reaped the benefits of the decade-long bull market that ended in March, but the first-quarter losses in near-retirement target-date funds clearly rattled investors.”
That was seen by an uptick in outflows from target-date funds designed for people within 15 years of retirement.
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