Study: Target funds miss the mark in 2011


February 9, 2012

While they have been incorporated into the financial retirement planning strategies of many investors over the past several years, an evaluation of the performance of so-called target-date funds finds that they had generally poor performance last year compared to other indices.

According to analysis from Morningstar, last year, the average fund with a target date roughly four years away dropped about 0.4 percent, SmartMoney reports. By comparison, the Dow Jones Industrial Average gained 8.4 percent over the year, Barclays' U.S. Bond Index rose just under 8 percent and the Standard & Poor's 500 gained 2.1 percent.

The funds are intended to gradually reduce the risk to investors' personal finances as they approach retirement by reducing their exposure to stock market fluctuations. However, the source said the poor results could bring about new debate over what the appropriate level of risk should be for those nearing retirement.

Analysts told SmartMoney that before 2011, target funds had performed relatively well. However, the funds' wide ranges of assets proved to be a negative factor last year, as instability in the market led to more demand for quality government bonds and blue chip stocks.

"They're intended to be diversified, and that should be an advantage over the long term," Josh Charlson, a fund analyst with Morningstar, told the source. "But it's not always going to work so well, particularly when there's a flight to quality in the market."

The funds have grown sharply in popularity in recent years. A report from the Employee Benefit Research Institute last month found that they were included in roughly 70 percent of company retirement plans. In addition, new participants in their 20s had more than 35 percent of their balances in those funds - more than double the percentage from 2006.

Some of the growth may be due to the fact that target funds were one of the potential options for plan participants who are automatically enrolled in retirement plans following the Pension Protection Act in 2006. Despite the poor performance seen last year, experts told SmartMoney that for investors who don't wish to choose their own investments, target-date funds still represent a valuable financial planning option to reduce risk. However, others said those with the skill to choose their own investments may still want to do so.

 

Comments

Leave a Comment
* All fields required
Your Name:*
Subject:*
Your Comment:*