The devastating effects of “sequence of returns” risk are by now well-documented. Workers retiring into a down market withdraw funds for everyday living expenses, selling low and locking in the loss with assets that are therefore unavailable for the eventual recovery.
It can decimate the portfolio to the point where it will most likely never recover, and it now appears those closest to retirement see—and are acting on—the danger.
A new paper from Jason Kephart, Morningstar’s associate director of multi-asset and alternative strategies research, found that “investors in target date mutual funds that are close to retirement pulled a net $9.4 billion in March as the coronavirus drawdown accelerated during the month. Investors further from retirement stayed the course.”
Target date funds supposedly encourage better participant behavior during market shocks, something witnessed in 2008 that Morningstar’s vice president of research and Kephart colleague John Rekenthaler frequently notes.
What’s happening
But the paper, titled Near-Retirement Target Date Investors Show Signs of Stress, reports that “net outflows from 2020 target date funds equaled roughly 4% of assets. That’s a much faster rate than the redemption of 2015 target date funds in the first quarter of 2015.”
Additionally:
- Total assets in target date mutual funds shrunk by 15% in the first quarter to approximately $1.17 trillion, down from $1.37 trillion at the end of 2019.
- Organic growth, which measures the growth of assets caused by inflows and outflows, sank to about 0% for the quarter, down from 2% in the first quarter of 2019.
- Vanguard, which has roughly 38% of the market share in target date mutual funds, had the most outflows in March, with a net $3.1 billion pulled from its series. The 2020, 2025, and 2030 vintages had the largest outflows.
“The uncertainty around the length and depth of COVID-19’s impact on the global economy and financial markets has given investors chills, especially those on the cusp of retirement,” Kephart concluded. “Still, staying the course is usually the most prudent option. Target date funds are designed to make that as easy as possible thanks to their automatic rebalancing and risk reduction over time, which makes them an ideal investment for most retirement savers.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
