Target date funds (TDFs) were first tested in 2008, when they failed to protect, losing more than 30% in funds dated 2010. Then 2022 tested again with a 13% loss for those near retirement in funds dated 2020. This recent test is not yet over, and is continuing into 2023.
According to S&P, 2020 TDFs are down 2.4% in the first 2 months of 2023. This isn’t too bad yet, but the results for the year ending February are alarming—all vintages have lost the same 6.3%. TDFs are not protecting those near retirement.
What just happened?
As shown in the following graph, most TDFs are not safe at their target date. They are 55% in equities, which caused the 2008 losses, AND most of the balance is in long term bonds that defended in 2008 but are not defending now. Bonds are down 9% for the year ending February while stocks are down 8%.
Most TDFs do not protect against Sequence of Return Risk. Losses sustained in the 5 years before and after retirement can spoil retirement with dignity.
A safe group of TDFs is also shown in the above graph:
- TSP is the Federal Thrift Savings Plan. At $800 billion it’s the largest in the world.
- OPEIU is the Office and Professional Employees International Union, one of the largest AFL-CIO unions.
- SMART is the SMART Target Date Fund Index that follows the patented Safe Landing Glide Path.
By protecting at the target date, this group’s 2020 fund has defended with a loss of only 2.4%. Importantly, their 2020 funds have lost much less than their 2060 funds. This is because they defend with Treasury bills and stable value rather than bonds, and they are much less in equities.
The point is that most TDFs are too risky at their target date, and that there are safe choices that are not used much, but serve to document the ability to protect.
Protecting those near retirement should be a requirement, but it’s not.
Conclusion
The ongoing unravelling of TDFs has generated interest in personalization because investing is personal. TDFs are still in their infancy, having started for 401(k) plans with the passage of the Pension Protection Act of 2006. We should expect an evolution that makes TDFs better or replaces them with an approach that is better for participants.
Ron Surz is CEO of Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), and author of the book "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates baby boomers on the risks and rewards in contemporary investing, and Ron’s book is a tour of these shows. He can be reached at Ron@TargetDateSolutions.com.