By Anne Tergesen
In the wake of the 2008 financial crisis, a number of the mutual fund companies that sponsor target-date funds have retooled their approaches to managing risk, especially in portfolios geared to people in or near retirement.
But according to a new report from Ibbotson—a division of Morningstar, Inc.—changes are routine for some target date fund sponsors. As a result, investors in these target date funds may experience unexpected changes in how quickly or slowly they will move into conservative investments over time—a transition known as a target date fund’s “glide path.”
“A common assumption—and one that investors and [401(k)] plan sponsors make decisions based on—is that the snapshot of the current implied glide path is indicative of the changes investors can expect in the aggressiveness of their funds throughout their lives. This is a bad assumption,” says the report, which was written by Ibbotson’s Global Chief Investment Officer, Tom Idzorek, and senior consultant Jeremy Stempien.
In recent years, some fund companies, the report says, have added “alternative” asset classes, including commodities to their holdings. Others have incorporated “tactical asset allocation overlays,” which allow managers greater latitude in switching from stocks to bonds or other investments to reach for higher returns. Still others may be rebalancing less often, in part to minimize transaction costs.
Such changes, Mr. Idzorek says, aren’t necessarily bad. “What is a problem,” he says, is that “sponsors and investors may well want a glide path that is extremely stable” in order to minimize surprises.
In particular, the report singles out Fidelity Investments, which together with Vanguard Group, Inc. and T. Rowe Price Group, Inc. manage more than 75% of the assets in open-ended target date funds. “It almost seems to me that Fidelity has been out of control of its glide path,” Mr. Idzorek says. The report adds: “The changes in the fund family’s glide path are shocking, especially at older ages…. (when) one would usually expect to see the most stability as investors in retirement have shorter investment time horizons and therefore typically should know how much equity they will hold during those years.”
According to Ibbotson, a 60-year-old investor in the Fidelity’s Freedom funds had 34% in equities in 2002. But by year-end 2006, a 60-year-old had a 53% equity allocation. “Because of this dispersion, it is very difficult to predict how much equity today’s 35 year old (or anyone not yet at retirement) will hold at retirement, and therefore hard to determine if the glide path is appropriate for those investors.”
Fidelity, in a statement, said: “The glide path should always incorporate the investment team’s “best thinking” regarding the assumptions and investor objectives. Since it is very likely that these key inputs into the investment process are likely to change over a multi-year period, it is reasonable to believe that there will be a variety of reasons why a glide path can and will evolve over time.”
“Fidelity’s investment process is singularly focused on shareholders at all times, and executing the investment strategy that provides the best opportunity for achieving the fund’s objective for shareholders.”
In contrast, the report singles out Vanguard and T. Rowe Price for the relative stability of their glide paths.
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