Thu Feb 9, 2012 2:23pm EST
BOSTON Feb 9 (Reuters) – More U.S. workers with
401(k) plans are selecting mutual funds that rebalance to safer
investments as they near retirement, but analysts say some of
these funds are still too aggressive.
So called target-date funds allow investors to select funds
that automatically change stock and bond allocations over time
so that safer investments become more prevalent as retirement
approaches. But there are dangers and analysts say the strategy
took a beating during the recent credit crisis because some
funds had large exposures to stocks.
Boston-based Fidelity Investments – the top 401(k) provider
in the United States with 11.6 million accounts – said on
Thursday that about 26 percent of its participants had 100
percent of their 401(k) assets in target-date funds at the end
of 2011. That was up from 21.4 percent during the same period in
2010 and 17.4 percent in 2009.
For example, Fidelity’s target-date Freedom Funds had $131
billion in assets under management at the end of 2011, up from
$126 billion in 2010.
“For many employees, with market volatility and lack of
confidence in their own skills, they’ve actually found that
target-date funds help them get some peace of mind,” said Beth
McHugh, a Fidelity vice president who analyzes customer trends.
But analysts say investors can be lulled into a false sense
of security because some funds maintain heavy stock allocations
as they near their target dates.
In fact, the percentage of equities at the target date
appears to have increased to 43 percent in December 2010 from
about 40 percent in December 2007, according to a study by
BrightScope Inc and Target Date Analytics LLC.
There is evidence, though, that funds adopted more prudent
management after the 2008 credit crisis, the study said.
Joe Nagengast, a principal at Target Date Analytics, said
target-date funds are especially good for younger workers,
because they do all the heavy lifting in the early accumulation
years.
“But when you near retirement age, it’s time to get out of
off-the-shelf allocation,” Nagengast said. “It’s time to go see
a professional adviser.”
Fund companies are seeing rapid adoption of target-date
portfolios among retirement savers, especially among new
workers.
T. Rowe Price Group Inc Chief Executive James
Kennedy told Reuters in a recent interview that target-date
funds have been a bright spot, while his company’s retail mutual
funds business has been slow. T. Rowe Price reported last month
that its mutual funds generated $2.2 billion of inflows in the
fourth quarter, driven mainly by target-date funds.
Target-date funds got a big lift in 2006 when the Pension
Protection Act allowed automatic enrollment into retirement
plans and a U.S. Department of Labor regulation designated this
all-in-one product as a default investment.
Target-date funds currently hold about $400 billion in
assets and research firm BrightScope expects assets to hit $2
trillion by 2020.
The funds are most popular with younger workers. For
example, 67 percent of workers between the ages of 20 and 24
using Fidelity funds allocated 100 percent of their 401(k)
assets to target-date portfolios.
The Employee Benefit Research Institute, a Washington,
D.C.-based nonprofit, said its 401(k) database shows the
percentage of participants who have held target-date funds for
two years or less was nearly 48 percent at the end of 2010. That
was up from 28 percent in 2006.
But during the height of the credit crisis, some target-date
funds took a beating. Some funds designed for participants
retiring in 2010 lost considerable value because of high
exposure to stocks. In one case, a fund lost more than 40
percent, according to a 2011 report by the U.S. Government
Accountability Office. The report said investors had no idea
they could lose so much money that close to their retirement
date.
It is also unclear if government policy encouraging the
adoption of target-date funds actually helps U.S. households.
Kent Smetters, a professor at the University of
Pennsylvania’s Wharton School, compared mistakes made by
target-date funds to investing errors made by retail investors.
In a May 2011 working paper for the National Bureau of Economic
Research in Cambridge, Massachusetts, Smetters and Jialun Li
found Americans do a reasonable job of managing their own money.
“Households appear to be doing quite well and make only
small mistakes at reasonable parameter values,” the paper
concluded. “Recent government attempts to simplify the
investment process could very well leave many households worse
off.”
