Despite the market turbulence of 2022 that has delivered crushing losses in both the stock and bond markets, T. Rowe Price is out with further evidence that target-date fund investors continue to steadfastly adhere to a long-term focus and stay the course.
Calling TDF investors “an oasis of calm despite sharing the pain in their own portfolios,” the Baltimore-based recordkeeper announced Monday that a minuscule 0.2% of participants with all of their assets in target-date funds on the T. Rowe Price recordkeeping platform made any changes to their asset allocation in the rocky second quarter of this year.
That compares with 6.4% making changes among those not holding any target date strategies, or an eye-opening 32-times the rate of target date investors.
This behavior is consistent with past market crises, T. Rowe Price points out. For example, in the first quarter of 2020 amid the outbreak of the COVID-19 pandemic, only 1.5 % of T. Rowe Price 401k recordkeeping participants with their entire balances in a target date portfolio made any investment changes, versus 9.2% of those with no target dates in their accounts.
Industrywide, target date solutions have of course become a mainstay investment for investors saving for retirement. The share of the 401k market invested in these portfolios quadrupled to 31% in 2019 versus 8% in 2007, according to the Investment Company Institute.
ICI figures also show the number of 401k plan participants owning target date strategies has grown from 26% in 2007 to 60% as of the end of 2019.
Retiring Jerome Clark offers perspective
The four original T. Rowe Price Retirement Funds reached their 20th anniversary on September 30, 2022. The T. Rowe Price target date suite, which now includes more than 100 mutual funds, collective investment trusts, and other investments with $311 billion in assets as of September 30, pioneered a path to higher exposure to equities throughout an investing lifespan to seek to ensure that retirees did not outlive their assets.
Now, more than 80% of participants on the T. Rowe Price 401k recordkeeping platform are partly or entirely invested in target date strategies.
“The 401k industry looked very different 20 years ago,” recalls Jerome Clark, the first portfolio manager of the T. Rowe Price target date strategies from 2002 to 2020. “The vast majority of plan sponsors used money market and stable value funds as their main default, not an ideal choice for a long-term investment horizon. Many plan participants needed a more sensible, diversified mix of equities and bonds, professionally managed and rebalanced over time, that put them on a better path for retirement. That’s the gap we aimed to fill.”
Morningstar, in naming Clark the outstanding portfolio manager of 2020 in its annual awards for investing excellence, called him, “a pioneer of target date investing,” saying that “the T. Rowe Price retirement series stood out from the crowd from the start with a more aggressive equity glide path than most peers, which has influenced its long-term success.”
Clark has announced that he will retire from T. Rowe Price at the end of this year.
Each of the four original target date products, the T. Rowe Price Retirement 2010, 2020, 2030, and 2040 Funds, outperformed their respective S&P Target Date benchmark indices, after fees, for the 3-, 5-, 10-, 15-, and 20-year periods ended September 30, 2022. Over the full 20-year period, the funds grew an initial $100,000 investment to a range of $346,964 to $507,133, after fees. The excess account balances delivered over their respective target date index benchmarks ranged from $66,887 to $86,047.
The structure of target date portfolios may have benefited investors by turning widespread investor inertia to their favor, by encouraging them to stay invested rather than trading in and out of the portfolios.
“We observed very early on that investors who constructed their own portfolios moved money around at a much more frequent rate than those who delegated their investments to professional money managers, which tended to negatively impact their returns,” said Wyatt Lee, the head of Target Date Strategies since 2019 and lead portfolio manager of the target date suite.
“Before the advent of target date funds, investors tended to either flee to safety during equity market downturns or to chase performance in robust markets. By helping to mitigate volatility during market turbulence due to their mix of equity and fixed income investments, target date portfolios became an important factor in helping investors weather the inevitable storms and maintain a long-term investment plan.”
Lee joined T. Rowe Price in 1999 and became a co-portfolio on target date portfolios with Clark in 2013. He was nominated by Morningstar as a Rising Talent in their 2020 annual awards for investing excellence.
SEE ALSO:
• Morningstar Honors Target Date Pioneer Jerome Clark for Investing Excellence
• Defaults Matter: T. Rowe Price Analysis Shows Just How Much
• Way Too Much Risk in 401k Target-Date Fund Glide Paths: Morningstar
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.