Target date investments are supposed to be an easier way to invest, and they’re a popular choice in 401(k) plans. But the recent market downturn showed that some target date strategies suffered much bigger losses than others, especially for investors nearing retirement.
Target date investments did protect near-retirees from the full force of the sell-off. While U.S. stocks overall lost 33% in the 30-day period ending March 20, the average target date fund for people retiring in 2020 dropped 17%, says Leo Acheson, director of multi-asset ratings at Morningstar. But losses among some popular funds ranged from 13% to 23%, reflecting dramatic differences in how the investments are constructed.
“Some of these 2020 funds, you might look at them and think they’re probably pretty similar to one another,” Acheson says. “But when you look beneath the hood, you find out that actually some 2020 funds are taking a lot more risks than other 2020 funds.”
An outsize loss by itself isn’t a good reason to bail on an investment. The same strategy that’s giving you heartburn now could deliver above-average returns later. If you’re approaching retirement, however, you want to be sure the investment strategy you’re using still makes sense. You have less time to make up losses — and more risk of running out of money.
HOW TARGET DATE STRATEGIES WORK
Target date investments come in two forms: mutual funds, which are available at brokerages and in workplace retirement plans, and collective investment trusts, which are found only in workplace plans. Although people use target date strategies in IRAs and taxable accounts, they’re particularly popular in 401(k)s. One Fidelity survey found about half of all assets in tax-exempt retirement funds are invested in target date options.