Target-Date Funds Shrug off Criticism, Pull in Investors

Article excerpt

Byline: Ruthie Ackerman

After massive losses in 2008, many on Wall Street expected investors in target-date funds to pull out their assets and put their retirement savings elsewhere.

But according to Morningstar Inc., investors have ignored the losses and resulting criticism and made target-date funds the focus of their retirement savings.

Target-date funds are retirement plans that combine stocks, bonds and other investments, and become more conservative as the investor approaches retirement age.

These mutual funds take the guesswork out for investors by allowing them to choose the year they intend to retire and then setting asset allocations for them.

Morningstar's 2010 Target-Date Series Industry Survey, which includes research on 20 of the largest target-date series, found that more than $45 million in new cash flowed into these funds in 2009.

The survey examined investor returns, which reflect monthly flows in and out of funds, and the returns earned. With target-date funds, investor returns over the past three years far exceeded returns on a traditional mutual fund, according to the survey.

"Target-date funds have been the subject of unprecedented regulatory, governmental and media criticism in the wake of 2008's market slide, but that has not deterred millions of investors from making these funds the centerpiece of their retirement savings," said Laura Pavlenko Lutton, editorial director for Morningstar's mutual fund research group. "Target-date funds have become the retirement vehicle of a generation, and for some good reasons. The funds have structural advantages over traditional mutual funds, including generally lower costs and dynamic asset allocation that automatically grows more conservative as investors age."

Morningstar found that fund companies have responded to the recent criticism of target-date funds.

In general, fund families in the survey have tried to lower fees. And several fund series have attempted to reduce risk by lowering the funds' equity allocations, which is what led to such large losses in 2008.

But Lutton isn't sure that changing the funds' equity exposure is the answer.

"Lower fees directly benefit investors, but changes to the funds' equity exposure could leave the industry open to charges that it's fighting the last market battle, and not positioning the funds correctly for the future," she said. …