Young workers in target-date funds hit hard by market drop

As the stock market has whipsawed for the past two weeks, young workers who have all their retirement funds tied up in long-range target-date funds may have been the hardest hit.

The average 25-year-old fully invested in a 2060 target-date fund series saw a 10 percent decline in account value from the market’s recent peak on July 17 through Monday’s close, according to Morningstar – close to the 10.96 percent decline of the S&P 500 over that period.
Meanwhile, the average 65-year-old set to retire this year and invested in a 2015 TDF series saw just a 5 percent decline.

Even if stocks continue rebounding in the days ahead, the experience of watching value shrink is an eye-opener to new investors who might not have thought about their risk tolerance before.

Target-date funds are designed to adjust an investor’s risk as retirement age approaches, through what is called a glide path. The farther out the fund’s end date, the higher the stock allocation. Investors in 2060 funds have equity exposure ranging from 83 percent to 94 percent, says Janet Yang, director of multi-asset-class manager research at Morningstar. In the 2015 funds, aimed at workers who will be retiring very soon, average equity exposure is just 42 percent.

The popularity of these funds in retirement plans is surging. Vanguard reports that 88 percent of the 401(k) plans it serves offered TDFs last year, up 17 percent from 2009. Four out of 10 plan participants are wholly invested in a single TDF, Vanguard says, and 64 percent of participants use them to some extent.

Many young workers are now automatically enrolled in 401(k) plans and put into a default allocation that typically is a target-date fund.
On the plus side, especially for young and inexperienced investors, these funds seem to have handcuffed the worst investor behaviors, like frequent trading. Asset-weighted average investor returns in TDFs are 1.1 percentage points higher than the funds’ average total returns, according to a Morningstar study published earlier this year.

But how will younger auto-piloted investors – now experiencing their first wild market swings – handle the volatility?

Learn more at Reuters Money.

 

Comments

  1. The older “smarter???” retirees missed out on half of the 300% gains in the market since 2009, but now their losses are less. Would you rather gain 300%, then lose 10% – or – gain 150%, then lose 5%. Clearly the former puts you in a much better position.

  2. Mark Miller says:

    Never said older are smarter – just pointing out that 25-year-olds are now experiencing their first bout of major volatility, and that when they are in automated funds like target date, may not have fully understood the risk they are facing. Agree with you that sticking with the plan always is best.

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