Risky Target Date Funds Revealed in Last Week’s 10% Correction

Imagine you are nearing retirement. You’ve been diligently stashing money away in your 401(k) and IRAs for decades. You think you are conservatively invested because you have a target 2020, 2025 or 2030 fund. Then last week happens; the markets drop 10% in just 10 days. Sure we’ve bounced back somewhat, but what if we hadn’t… or worse. What if we had kept going down?

What can we learn from a quick 10% correction?

Turns out, a lot.

Over 56 million Americans are active participants in the retirement plan (401(k), 403(b), etc.) they get through work. Most of these plans have a series of Target Date Funds (TDFs) as investment options. And most Americans use these TDF options because they are an automated investment, getting more an more conservative as they approach retirement.

Set it and forget it right?

2020 Funds are designed for people who are planning on retiring in or around the year 2020. These are the most conservative of the target date funds for folks still working. Most investors think that all they need to do is pick the target date closest to their retirement and sit back and let the magic happen. And for some TDFs, that may be true. For others…

So how did they do in the drop?

Some were hit quite hard in the last two weeks. If you are one of the nearly five million participants whose 401(k) or 403(b) is with Principal, you may have one of their target date series. The Principal LifeTime 2020 Institutional shares were down a whopping 6.3% during the correction — the second worst performer of the 50+ 2020 funds we analyzed. That’s a 63% down capture of the market! If this had been more than a small correction, and an actual 20%+ decline from a bear market, your retirement nest egg could have been down nearly 13% or more! Behemoths Fidelity and T.Rowe Price (two of the largest TDF shops) didn’t fare much better, with Fidelity Adviser Freedom 2020 I and T. Rowe Price Retirement 2020 funds losing about 6% each.

There were only seven 2020 funds that managed to pare losses to less than 4% during the correction. JHancock Multi-Index 2020 Preserve R6 was down a meager 2.4% — providing the most protection of all the 2020 target date funds. Goldman Sachs, Invesco, Putnam, MFS, and Great-West all did an excellent job preserving capital in the correction with 3.2% to 3.7% losses.

Great-West deserves special recognition. Not only did the fund’s portfolio preserve capital exceptionally in the correction (-3.7%), but they managed to perform well during the unprecedented climb in 2017. Compare Great-West Lifetime 2020’s 2017 returns of 12.8% with the 13.5% return of Principal LifeTime 2020 (the second-worst performer in the recent correction). Many pre-retirees would gladly give up the 0.7% of upside for only 59% of Principal’s downside.

Here is a link to our spreadsheet showing how the 50 largest 2020 Target Date Funds did from 1/26/18 through 2/8/18.

The sell-off we just went through was only 10% from peak to trough. Someday a much larger decline will occur. It isn’t a matter of if but when. If you are approaching retirement and your 2020 (or 2025 or 2030) TDF performed poorly, you should do something about it. Speak up. Talk to your Human Resources Department and ask them why and how they decided to choose the particular brand of Target Date Fund in your 401(k). The truth is you, and other employees around your age are the most important demographic to consider when choosing these options. Even if you are far from retirement, your mother or father is probably getting close. Use this market shock as a small test to see how your, and their, portfolio may do when the next bear comes knocking.

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