Having a Target Seems to Help
What if Congress passed a law to help investors, and it actually did? About a decade ago these pages covered a pressing problem with participant-directed 401(k) retirement plans. A lot of those participants weren’t showing much interest in self-directing their investments. At the same time, employers and plan trustees didn’t want the liability of automatically steering those accounts into anything but the most conservative alternative, often a money market fund. Letting retirement savings idle away the decades at short-term interest rates seemed a dubious strategy. Enter the Pension Protection Act of 2006. One provision of that huge legislation laid out guidelines for something called a Qualified Default Investment Alternative (QDIA). Plans could automatically direct participant contributions into investments meeting those guidelines and be substantially insulated from liability. Investment companies responded with a proliferation of target-date retirement funds, the most familiar type of QDIA. As these pages have previously discussed, target-date funds are broadly diversified allocations designed to gradually shift their holdings as the targeted date draws nearer. Such funds now hold more than $755 billion in assets, up ten-fold in less than a decade. Of course, popularity is not always predictive of great investment results, and investors are notoriously poor timers. Over the years a host of studies have indicated that the actual returns experienced by mutual fund investors typically fall short of the performance of the funds they hold. But the popularity of target-date funds is not a case of chasing hot market sectors or stocks. Mutual fund researcher Morningstar studied investor experience across the dozen fund companies that had target-date offerings for the full decade ended December 31, 2014. Morningstar found that, on average, those investors experienced somewhat better returns than the funds themselves. On an asset-weighted basis, their average annualized return was pegged at 6.13% compared to [...]